SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the fiscal year ended September 30, 1997

                                       or

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to  _______

                           Commission File No. 0-18728

                        INTERNEURON PHARMACEUTICALS, INC.
                        ---------------------------------
             (Exact name of registrant as specified in its charter)

  Delaware                                                     043047911
  --------                                                     ---------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                           Identification Number)


One Ledgemont Center, 99 Hayden Avenue, Lexington, MA                   02173
-----------------------------------------------------                   -----
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:  (781) 861-8444
                                                     --------------
Securities registered pursuant to Section 12(b) of the Act:  None

Securities  registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report(s)), and (2) has been subject to the filing
requirements for the past ninety (90) days.  YES  X    NO
                                                 ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].

The aggregate market value of the voting and non-voting common equity (excluding
preferred stock convertible into and having voting rights on certain matters
equivalent to 622,222 shares of common stock) held by non-affiliates of the
registrant was approximately $222,000,000 based on the last sales price of the
Common Stock as of December 22, 1997.

As December 22, 1997, 41,170,810 shares of Common Stock, $.001 par value, of the
registrant were issued and outstanding (excluding treasury shares).

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

See Part III hereof with respect to incorporation by reference from the
registrant's definitive proxy statement for the fiscal year ended September 30,
1997 to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 and the Exhibit Index hereto.


                                        2

<PAGE>

PART  I

         Statements in this Form 10-K that are not statements or descriptions of
historical facts are "forward-looking" statements under the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward looking statements and other forward looking
statements made by the Company or its representatives are based on a number of
assumptions and actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" and elsewhere in, or incorporated by reference into, this Form 10-K
including, in particular, risks relating to withdrawal of Redux and
Redux-related litigation, uncertainties relating to CerAxon, uncertainties
relating to regulatory approvals and clinical trials, product liability, risks
relating to funding requirements, manufacturing and marketing, managing growth,
contractual arrangements, government regulation, competition, patents and
proprietary rights, dependence on third parties, dependence on key personnel,
uncertainty regarding pharmaceutical pricing and reimbursement and other risks.
See "Risk Factors".

         Redux(TM) is a trademark of Les Laboratoires Servier, licensed to the
Company and American Home Products Corp. ("AHP"). Bextra(TM), CerAxon(TM),
Melzone(TM), PMS Escape(R), ProHydrator(TM), ProEnhancer(TM) and Race Day(TM)
are trademarks of the Company. LidodexNS(TM) is a trademark of Algos
Pharmaceutical Corp., licensed to the Company. All other trademarks or trade
names referred to in this report are the property of their respective owners.

Item 1.  Business.

         (a)  General  Development of Business

         Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral diseases. The Company seeks to acquire, develop and commercialize
products with international market experience or that are in clinical or late
pre-clinical development. The Company is currently developing four therapeutics:
CerAxon for stroke, pagoclone for panic and anxiety, LidoDexNS for migraine
headache and, through Intercardia, Bextra for congestive heart failure. The
Company's four subsidiaries (the "Subsidiaries") include: Intercardia, Inc.
("Intercardia") focused on cardiovascular disease; InterNutria, Inc.
("InterNutria") focused on dietary supplement products and Transcell
Technologies, Inc. ("Transcell") focused on carbohydrate-based drug discovery
(all of which are majority-owned subsidiaries) and Progenitor, Inc.
("Progenitor"), a minority- owned unconsolidated subsidiary focused on
functional genomics.

         On September 15, 1997, the Company announced the withdrawal of its
first prescription product, the weight loss medication Redux (dexfenfluramine
hydrochloride capsules) C-IV, which had been launched by AHP, the Company's
licensee, in June 1996. Simultaneously, Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of AHP, announced withdrawal of the weight loss
medication Pondimin (fenfluramine hydrochloride tablets) C-IV. Interneuron has
been named, together with other pharmaceutical companies, as a defendant in
approximately 200 legal actions, many of which purport to be class actions, in
federal and state courts involving the use of Redux and other weight loss drugs.
On December 10, 1997, the federal Judicial Panel on Multidistrict Litigation
issued an Order allowing for the transfer or potential transfer of the federal
actions to the Eastern District of Pennsylvania for coordinated

                                            
                                        3

<PAGE>

or consolidated pretrial proceedings. The Company has also been named as a
defendant in several lawsuits filed by alleged purchasers of the Company's
common stock, purporting to be class actions, claiming violation of the federal
securities laws. The withdrawal of Redux and the related litigation may
materially adversely affect the Company and its financial condition. See "Legal
Proceedings" and "Risk Factors".

         Unless the context indicates otherwise, "Interneuron" refers to
Interneuron Pharmaceuticals, Inc., the "Company" refers to Interneuron and its
Subsidiaries, "Intercardia" refers to Intercardia, Inc. and its subsidiaries,
and "Common Stock" refers to the common stock, $.001 par value, of Interneuron.

         The Company was originally incorporated in New York in October 1988 and
in March 1990 was reincorporated in Delaware. The Company's executive offices
are located at One Ledgemont Center, 99 Hayden Avenue, Lexington, Massachusetts
02173. The Company's telephone number is (781) 861-8444, its fax number is (781)
861-3830, and its Internet address is http://www.interneuron.com.

         (b)  Financial Information about Industry Segments

              The Company operates in only one business segment.

                               
                                        4

<PAGE>

         (c)  Narrative Description of Business
<TABLE>
<CAPTION>
PRINCIPAL PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

INTERNEURON(1):
                                                                          COMMERCIAL
PRODUCT           INDICATION/USE               STATUS(2)                  RIGHTS
-------           --------------               ---------                  ------
<S>              <C>                          <C>                         <C> 
CerAxon              Stroke                    New Drug Applica-          U.S. and Canada
(citicoline)                                   tion (NDA) submitted
                                               December 1997

Pagoclone            Anxiety/Panic             Phase 2/3 trial            Worldwide, except for
                     disorders                 initiated                  France, where  Rhone-
                                               November 1996              Poulenc Rorer Pharmaceuticals,
                                                                          Inc. ("RPR") retains rights

LidodexNS            Migraine headache         Pre IND (Investiga-        Worldwide;
                                               tional New Drug            development and marketing
                                               Application)               collaboration with
                                                                          Algos Pharmaceutical Corp.
                                                                          ("Algos")
</TABLE>
-------------------------
(1)   Excludes Redux, which was licensed to AHP and withdrawn from the market in
      September 1997. See "Interneuron Products - Redux," "Management's
      Discussion and Analysis of Financial Condition and Results of Operations"
      and "Risk Factors."

(2)   See "Government Regulation"

                             
                                        5

<PAGE>

                                  SUBSIDIARIES
<TABLE>
<CAPTION>
INTERCARDIA:

PRODUCT OR                 INDICATION/                                          COMMERCIAL
TECHNOLOGY                 USE                       STATUS(2)                  RIGHTS
----------                 ---                       ---------                  ------
<S>                        <C>                       <C>                        <C> 
Bextra                     Congestive                Phase 3                    Worldwide; twice-daily
(bucindolol)               heart failure                                        formulation licensed
                                                                                in U.S. to Astra Merck
                                                                                Inc. ("Astra Merck"); licensed in
                                                                                Europe and other areas out-
                                                                                side the U.S. and Japan to
                                                                                BASF Pharma/Knoll AG ("Knoll")

Antioxidant                Diseases                  Preclinical                Worldwide
small molecules            associated with
                           oxygen free
                           radicals

Hepatic stem cell          Diseases of the liver     Research                   Worldwide
technology



TRANSCELL:

POTENTIAL                  CORE                                                 COMMERCIAL
APPLICATION                TECHNOLOGY                STATUS(2)                  RIGHTS
-----------                ----------                ---------                  ------
Drug discovery             Combinatorial             Research;                  Worldwide; Rights to two
                           carbohydrate              Preclinical                distinct structural classes
                           chemistry                                            of anti-bacterial agents
                                                                                licensed to Merck & Co.,
                                                                                Inc. ("Merck"); option to
                                                                                expand license by Merck to
                                                                                include all antibacterial
                                                                                agents



INTERNUTRIA:
                                                                                COMMERCIAL
PRODUCT                    USE                       STATUS                     RIGHTS
-------                    ---                       ------                     ------

PMS Escape                 Dietary supplement        National launch            Worldwide
                           for pre-menstrual         initiated in
                           syndrome                  September 1997

Pro Enhancer and           Dietary supplements       Targeted test              Worldwide
Race Day                   for replacement of        launches initiated
                           certain dietary           September 1997
                           nutrients and enhance-
</TABLE>

                   
                                        6

<PAGE>
<TABLE>
<CAPTION>
<S>                        <C>                       <C>                        <C> 
                           ment of athletic
                           performance
                           and reduction of
                           fatigue

Pro Hydrator               Dietary supplement        Targeted test              Worldwide
                           for prevention of         launch initiated
                           of dehydration in         September 1997
                           athletes

Melzone                    Dietary supplement        Regional test launch       Worldwide
(low-dose                  for normal                initiated in fiscal 1997
melatonin)                 sleep

</TABLE>

<TABLE>
<CAPTION>
PROGENITOR:

RESEARCH AND                                                                    COMMERCIAL
DEVELOPMENT PROGRAMS                STATUS(2)                                   RIGHTS
--------------------                ---------                                   ------
<S>                                <C>                                          <C>   
HFE Hereditary Hemochromatosis      Market launch expected                      Worldwide; licensed certain
Diagnostic                          1998                                        rights to SmithKline Beecham
                                                                                Clinical Laboratories ("SBCL")

HFE Therapeutic Protein             Preclinical                                 Worldwide

B219 Leptin Receptor                Preclinical                                 Worldwide; licensed
                                                                                certain rights to Amgen, Inc.
                                                                                ("Amgen")


Del-1 Blood Vessel                  Gene Research                               Worldwide; Interneuron owns
Gene and del-1 Protein                                                          option to acquire certain rights

BFU-e Blood Cell                    Research                                    Worldwide; licensed certain rights
Growth Factor                                                                   to Novo Nordisk A/S ("Novo
                                                                                Nordisk")

T7T7 Gene Therapy                   Preclinical                                 Worldwide; licensed certain rights
                                                                                to Chiron Corporation ("Chiron")
</TABLE>
                        
                                        7

<PAGE>

INTERNEURON PRODUCTS

Redux

         Product Withdrawal and Legal Proceedings: On September 15, 1997, the
Company announced the withdrawal of the weight loss medication Redux and,
simultaneously, Wyeth-Ayerst announced withdrawal of the weight loss medication
Pondimin. On September 12, 1997, the Food and Drug Administration ("FDA")
provided the Company and Wyeth-Ayerst and manufacturers and marketers of
phentermine with new, preliminary and summary information (which has recently
been updated and revised by the FDA) concerning potential abnormal
echocardiogram findings in patients using these drugs. These patients had been
treated with Pondimin or Redux for up to 24 months, most often in combination
with phentermine. Redux was launched in June 1996.

         These observations presented by the FDA reflected a preliminary
analysis of pooled information rather than results of a formal clinical
investigation, and are difficult to evaluate because of the absence of matched
controls and pretreatment baseline data for these patients. Nevertheless, the
Company believes it was prudent, in light of this information, to have withdrawn
Redux from the market.

         As reported in the original preliminary information provided by the
FDA, abnormal echocardiogram findings were reported in 92 of 291 subjects
evaluated. As originally reported, 271 of the 291 patients had taken
fenfluramine in combination with phentermine (commonly referred to as the
"fen/phen" combination), 11 had taken Redux alone and nine had taken a
combination of Redux and phentermine. As originally reported, of the 20 who took
Redux alone or in combination with phentermine, six had abnormal
echocardiograms, and two of the six took Redux alone.

         The FDA has continued to evaluate the data from the original 291 cases.
In a recent update, the FDA has reported to the Company that, revising the
originally reported data, of the 291 cases, 15 patients had taken Redux alone
and 21 had taken Redux plus phentermine. Of the 15 taking Redux alone, two
patients had abnormal echocardiograms and of the 21 taking Redux plus
phentermine, 13 patients had abnormal echocardiograms. The FDA-approved
prescribing information (label) for Redux recommended against using Redux in
combination with other appetite suppressants. The Company believes, based on
industry databases, that over 90% of prescriptions written for Redux
were for Redux alone (without combination with another appetite suppressant).

         Additional adverse event reports of abnormal heart valve findings in
patients using Redux or fenfluramine alone or in combination with other weight
loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the FDA.
These reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.

         Additional echocardiogram studies are being supported by Wyeth-Ayerst
to compare patients who had taken either Redux or the "fen/phen" combination
with a matched group of obese patients who did not receive any anti-obesity
drugs. The study is being conducted and will be analyzed by an independent,
blinded panel of cardiologists to compare the incidence of significant heart
valve abnormalities in treated compared to non-treated groups. In addition,
Interneuron has initiated a separate study that is comparing echocardiograms of
patients who took Redux alone to echocardiograms of a control group of patients
who
                                                                             
                                        8

<PAGE>

did not take any anti-obesity medication to measure the prevalence and severity
of abnormal cardiac valvular findings among the two sets of patients. At least
an estimated 300 patients will be included in each of the Redux and control
groups. The costs of this Company-supported study are estimated at up to
approximately $4,000,000. A number of other clinical studies relating to the
prevalence of abnormal echocardiogram findings in patients who took Redux (and
other anti-obesity agents) compared to non- treated patients have been and may
be conducted by others.

         On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of people
who took Pondimin or Redux. HHS recommended, until more complete information is
available, that patients who took either drug should see their physician to
determine whether there are signs or symptoms of heart or lung disease and if
such person has signs or symptoms of heart or lung disease, such as a new heart
murmur or shortness of breath, have an echocardiogram performed; and that
physicians strongly consider performing an echocardiogram before a patient who
has taken either drug has any invasive procedure for which antibiotic
prophylactic treatment is recommended to prevent the development of bacterial
endocarditis.

         Interneuron has been named, together with other pharmaceutical
companies, as a defendant in approximately 200 legal actions, many of which
purport to be class actions, in federal and state courts involving the use of
Redux and other weight loss drugs. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings. The Company
has also been named as a defendant in several lawsuits filed by alleged
purchasers of the Company's common stock, purporting to be class actions,
claiming violation of the federal securities laws. The withdrawal of Redux and
related litigation may materially adversely affect the Company and its financial
condition. See "Legal Proceedings" and "Risk Factors - Risks Relating to
Withdrawal of Redux and Legal Proceedings".

         Background; Regulatory Approval, Labeling and Safety Issues: Redux
(dexfenfluramine) is chemically related to Pondimin (fenfluramine). Fenfluramine
is a drug made up of two mirror-image halves - a "right-handed" half (d-isomer)
and "left-handed" half (l-isomer) - and dexfenfluramine is the right-handed
isomer of fenfluramine (the left-handed half is "levofenfluramine").
Dexfenfluramine alone is a separate drug from the combined
dexfenfluramine/levofenfluramine molecule that is fenfluramine.

         Redux received clearance on April 29, 1996 by the FDA for marketing as
a twice-daily prescription therapy to treat obesity. The approved indication was
for the management of obesity, including weight loss and maintenance of weight
loss in patients on a reduced calorie diet who have a body mass index ("BMI") of
greater than or equal to 30 kg/m2 or greater than or equal to 27 kg/m2 in the
presence of other risk factors, such as hypertension, diabetes and elevated
cholesterol. BMI, a relationship between height and weight, is a widely-used
measure of obesity. Under license and copromotion agreements, Redux was marketed
in the U.S. until its withdrawal by Wyeth-Ayerst and copromoted by the Company.

         Marketing clearance of Redux by the FDA followed a second meeting of
the Endocrinologic and Metabolic Advisory Committee (the "Advisory Committee")
of the FDA on November 16, 1995 at which

                                                                         
                                        9

<PAGE>

time the Advisory Committee recommended, by a vote of 6 to 5, the approval of
Redux to treat obesity. The Advisory Committee also recommended, and the Company
agreed, that Phase 4, or post-marketing, studies be conducted and that certain
labeling guidelines be implemented. Included in the FDA-approved labeling for
Redux were references to certain risks that may be associated with
dexfenfluramine and which were highlighted during the FDA's review of the drug.
One issue relates to whether there is an association between appetite
suppressants, including dexfenfluramine, and the development of primary
pulmonary hypertension ("PPH"), a rare but serious lung disorder estimated to
occur in the general population at one to two cases per million adults per year.
An epidemiologic study conducted in Europe known as IPPHS (International Primary
Pulmonary Hypertension Study) examined risk factors for PPH and showed that
among other factors, weight reduction drugs, including dexfenfluramine, and
obesity itself were associated with a higher risk of PPH. In the final report of
IPPHS, published in the New England Journal of Medicine (August 29, 1996), the
authors re-classified and included certain previously excluded cases of PPH,
resulting in an increase in the estimated yearly occurrence of PPH for patients
taking appetite suppressants for greater than three months' duration to be
between 23 and 46 cases per million patients per year. The revised labeling for
Redux disclosed this revised estimate.

         The FDA-approved labeling for Redux also includes discussion as to
whether dexfenfluramine is associated with certain neurochemical changes in the
brain. Certain studies conducted by third parties related to this issue purport
to show that very high doses of dexfenfluramine cause prolonged serotonin
depletion in certain animals, which some researchers believe is an indication of
neurotoxicity. The Company has presented data relating to the lack of
neurocognitive effects in patients taking Redux to the FDA and believes that, as
demonstrated in human trials, these animal studies are clinically irrelevant to
humans because of pharmacokinetic differences between animals and humans and
because of the high dosages used in the animal studies. In connection with the
approval of Redux, the Company and Wyeth- Ayerst agreed with the FDA to conduct
a Phase 4, or post marketing, study with patients taking Redux. Following the
withdrawal of Redux, this study was terminated.

         In July 1997, the Mayo Clinic reported observations of heart valve
abnormalities in 24 patients taking the combination of Pondimin and phentermine.
The Mayo Clinic cases were subsequently reported in an article appearing in the
August 28, 1997 issue of The New England Journal of Medicine. This article was
accompanied by a letter to the editor from the FDA reporting additional cases of
heart valve disease in 28 patients taking the combination of phentermine and
fenfluramine, two patients taking fenfluramine alone, four patients taking Redux
alone and two patients taking Redux and phentermine.

         Redux Revenues; Charges to Operations: A significant portion of
Interneuron's revenues had been derived from Redux sales and, accordingly, will
not recur as a result of the product's withdrawal. The Company's revenues
relating to Redux were derived primarily from: (1) royalties paid by AHP to the
Company based on the net sales of Redux capsules by AHP to distributors; (2)
profit sharing between the Company and AHP on Redux sales by the Company's sales
force and financial support of the Company's sales force provided by AHP; and
(3) sales of Redux capsules to AHP. In connection with the withdrawal of Redux,
the Company incurred charges to operations in the fourth quarter and fiscal year
ended September 30, 1997, aggregating approximately $10,800,000. See
--"Agreements", "Legal Proceedings", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors - Risks
Relating to Withdrawal of Redux and Legal Proceedings".

                                                                      
                                       10

<PAGE>

CerAxon (citicoline)

         General: CerAxon (cytidyl diphosphocholine, or citicoline) is under
development by the Company as a potential treatment for ischemic stroke. An
ischemic stroke occurs when brain tissue dies or is severely damaged as the
result of interrupted blood flow caused by a clogged artery which deprives an
area of the brain (the "infarct") of blood and oxygen. This loss of blood flow
and oxygen causes, among other events, a breakdown of brain cell membranes, and
places the surrounding tissue (the "penumbra") at risk for death, leading to an
extension of the size of infarct believed to result from the release and
oxidation of such compounds as free fatty acids. This release is likely caused
in part by the inappropriate release of glutamate and other neurotransmitters.

         Mechanism of Action: CerAxon is believed to have multiple mechanisms of
action in diminishing the effects of stroke. CerAxon is believed to prevent the
accumulation of fatty acids, which would otherwise yield toxic oxidation
products, by incorporating them into membrane constituents. CerAxon is also
believed to promote the formation of additional membrane elements needed by
damaged neurons to restore functional activity by raising blood levels of
choline and cytidine, substrates believed to be essential for the formation of
the nerve cell membrane. CerAxon is thereby believed to help stabilize the cell
membrane and, as a result, decrease edema, or brain swelling, caused when blood
flow to brain cells is stopped, and re-establish normal neurochemical function
in the brain. Also, CerAxon is believed to increase levels of acetylcholine, a
neurotransmitter believed to be associated with learning and memory functions.

         NDA Submission: On December 15, 1997, the Company submitted to the FDA
an NDA for CerAxon to treat ischemic stroke. Data in the NDA include the results
of Phase 3 trials conducted by Interneuron in the U.S., supporting data from a
Japanese clinical trial conducted by Takeda Chemical Industries, Ltd. ("Takeda")
and supportive clinical and post-marketing data from more than 30 countries
where CerAxon has already been approved. The Company is unable to predict
whether or when the NDA will be accepted for filing by the FDA or whether the
FDA will grant authorization to market CerAxon in the U.S. See "Risk Factors --
Uncertainties Related to CerAxon."

         The Company is also conducting several Phase 3b clinical trials to
study CerAxon's effect on stroke recovery and reduction in infarct size in
ischemic stroke patients. These studies are expected to enroll up to an
aggregate of approximately 800 patients and to be completed in fiscal 1999. The
Company may initiate further studies beginning in fiscal 1998 or fiscal 1999 to
explore areas such as post-stroke learning and memory, combination with
thrombolytic therapies and other clinical paradigms such as treatment or
prevention of peri-operative strokes and treatment of head trauma.

         Review of Pivotal (Phase 3) trial: During fiscal 1997, the Company
completed its second pivotal clinical trial in the U.S. with CerAxon to treat
patients suffering from ischemic stroke. The results of this trial were
announced in July 1997.

         In this study, 267 patients received CerAxon and 127 patients received
placebo. The primary outcome analysis of this double-blind, placebo-controlled
trial was improvement in the Barthel Index, a 100 point rating scale of
functional capabilities in neurological patients, at a time point three

                                                                               
                                       11

<PAGE>

months after an ischemic stroke. Patients were considered to have achieved
complete or near-complete functional recovery if they achieved a Barthel score
of 95 or 100 at three months.

         There was an unexpected highly significant baseline imbalance in the
percentage of placebo versus CerAxon-treated patients who had mild strokes on
study entry (34 percent for placebo vs. 22 percent for CerAxon (p = 0.006)), due
to chance. The study was influenced by the significant preponderance of mild
cases in the placebo group. As a result of this imbalance and other statistical
factors, the primary analysis of the study, the distribution of Barthel Index
scores in CerAxon vs. placebo-treated patients as a function of baseline
National Institutes of Health ("NIH") Stroke Scale scores, did not achieve
statistical significance. However, this primary analysis was statistically
invalid because the patient imbalance and other statistical factors failed to
satisfy the requirements for the correct operation of the statistical model.
Therefore, a protocol-defined responders analysis, percentage of patients who
achieve a Barthel Index greater than or equal to 95, among patients with
moderate to severe strokes, was employed.

         In the responders analysis, 41 percent of CerAxon-treated patients with
an NIH stroke scale on entry of greater than or equal to eight (moderate to
severe strokes) achieved a Barthel Index of greater than or equal to 95 compared
to 25 percent of placebo-treated patients (OC (observed cases) analysis, p =
0.02). Thus, patients with moderate to severe stroke treated with CerAxon had a
64 percent greater chance of complete or near-complete recovery relative to
patients with moderate to severe stroke treated with placebo. In the LOCF (last
observation carried forward) analysis, 33 percent of moderate to severe CerAxon
patients and 21 percent of moderate to severe placebo patients achieved a
Barthel Index of greater than or equal to 95, a 57 percent increased chance of
improvement in recovery (p = 0.05).

         Overall, patients who had mild strokes on entry into the study (NIH
Stroke Scale 5 through 7) had an excellent clinical outcome regardless of
placebo or CerAxon treatment. For example, approximately 80 percent of patients
with mild strokes who received placebo and a similar percentage of
CerAxon-treated patients with mild strokes achieved a Barthel score of greater
than or equal to 95 at three months.

         In another protocol-defined measure of functional clinical outcome, the
6-point Rankin scale of physician-rated global assessment was utilized. A Rankin
score of 0 or 1 at study completion indicated complete or near-complete lack of
disability. Among patients with moderate to severe strokes, 24 percent of
CerAxon-treated patients vs. 11 percent of placebo treated patients achieved a
Rankin score of 0 or 1, a 127% improvement in outcome (OC analysis, p = 0.02).
In the LOCF analysis, 19 percent of moderate to severe CerAxon patients and 11
percent of moderate to severe placebo patients had a Rankin scale of 0 or 1, a
73% improvement in outcome (p = 0.08).

         A preliminary safety review indicated that CerAxon was well tolerated.
There did not appear to be any adverse events that differed in frequency from
placebo-treated patients. The mortality rates for drug- treated and
placebo-treated patients were identical (18 percent in each group).

         Review of Pivotal (Phase 2/3) trial: Interneuron's initial pivotal
study of CerAxon in stroke was reported in 1996. Findings from that trial were
published in Neurology in July 1997.


                   
                                       12

<PAGE>

         The primary efficacy outcome in this study of 259 patients was
improvement in neurological function, as assessed by the Barthel Index. Among
all patients who received 500 milligrams daily of CerAxon, 53% achieved a score
of greater than or equal to 95 on the Barthel Index at 12 weeks, indicative of
complete or near-complete recovery from stroke, compared with 33% of
placebo-treated patients, a 61% improvement in outcome (p less than 0.04).

         Patients in both the 500 milligram and 2000 milligram groups exhibited
significantly greater (p less than 0.05) improvement on the Barthel Index at
week 12 than placebo-treated patients. In addition, more patients in the 500
milligram and 2000 milligram groups exhibited normal or near normal scores in
mental function (p less than 0.04), as measured by the Mini-Mental State Exam,
which grades the cognitive state of patients.

         Patients who received 500 milligrams of CerAxon daily were more than
twice as likely to manifest minimal or no disability at 12 weeks following
stroke as patients who received placebo, as measured by the NIH Stroke Scale.
The NIH Stroke Scale analysis showed that 34% of all CerAxon-treated patients
versus 16% of placebo-treated patients achieved complete or near-complete
normalization of function, as indicated by scores 0 to 1, at 12 weeks following
stroke, a 125% of improvement in outcome (p less than 0.04).

         In addition, global neurologic status, assessed by the Rankin Scale
mean scores, was significantly improved (p less than 0.04) with CerAxon
treatment compared to placebo.

         Efficacy outcome measures for the 1000 milligram daily group did not
reach statistical significance in this trial. Patients in the 1000 milligram
group had a higher proportion of chronic pre-existing cardiac and pulmonary
disorders. These confounding variables may explain the performance of the 1000
milligram group in the trial.

         A small subgroup of patients were studied at the Beth Israel Hospital
in Boston with a specialized imaging technique to measure the size of the
infarct, or damage caused by the stroke. Analysis of this group of patients
suggests that CerAxon treatment limited the size of infarct following
interrupted blood flow. The Company is studying CerAxon's effect on reduction of
infarct size in Phase 3b clinical trials currently in progress.

         There was no significant difference in the incidence of death among the
four treatment groups in the trial. All doses of CerAxon were well tolerated, as
indicated by analyses of adverse events and laboratory findings. The only
statistically significant differences among CerAxon-treated patients versus
placebo-treated patients were an increase in accidental injuries, e.g., falling
down. However, the 500 milligram dose CerAxon group did not significantly differ
from the placebo group in these parameters.

         Given the degree of effectiveness of the 500 milligram daily dose and
the absence of significant differences in adverse events between this dosage
level and placebo, 500 milligrams daily appears to be the optimal dose derived
from this study and was the dose chosen by the Company for additional clinical
testing.
                                                                            
                                       13

<PAGE>

         Takeda Clinical Data: In April 1997, Interneuron entered into a data
transfer pact with Takeda that provided Interneuron with primary data from a
previously unpublished clinical trial demonstrating improved functional recovery
and reduced mortality among stroke patients who received citicoline as compared
to those who received placebo in a double-blind fashion.

         Takeda, which markets citicoline in Japan and other countries under
various trade names, conducted the study among 267 ischemic stroke patients to
evaluate functional improvement up to four months and mortality rates within one
year after a stroke. The study demonstrated significant functional improvement
at four months after stroke as measured by a physician-based global assessment
ratings similar to the Rankin scale used in the U.S. studies (p < 0.05) and a
reduction in mortality within one year of approximately 50 percent in the
citicoline group (p = 0.01).

         The Company believes the Takeda well-controlled clinical trial data
will be an important supportive study to complement Interneuron's two U.S.
pivotal trials of CerAxon in ischemic stroke. In the Takeda study, citicoline
was given at a dose of 1000 milligrams per day intravenously for two weeks.
While there are differences in the dosage, route of administration and duration
of therapy of citicoline in the Japanese study compared to the U.S. studies, the
Company believes the efficacy and mortality benefit in the Takeda trial supports
the utility of CerAxon in stroke.

         Manufacturing and Marketing: The Company is currently evaluating the
commercialization strategy for CerAxon, subject to required regulatory
approvals. The Company is currently planning to conduct sole direct marketing of
the product but may consider a combined marketing strategy which includes
contracting with certain companies for the copromotion of the product and/or
establishing a contract salesforce for certain market segments. The Company
expects that it will be required to expand its sales force by an additional
approximately 200 representatives, to hire additional headquarters-based
medical, marketing and administrative support personnel and to establish
distribution arrangements. In the event the Company markets CerAxon directly,
significant funds would be required for manufacturing, distribution, marketing
and selling efforts.

         The Company is dependent upon third party suppliers of citicoline bulk
compound and finished product for manufacturing in accordance with the Company's
requirements and U.S. Good Manufacturing Practices ("GMP") regulations. Supplies
of citicoline finished product used for clinical purposes have been produced on
a contract basis by a third party manufacturer. The Company is subject to an
agreement with Grupo Ferrer ("Ferrer"), a Spanish pharmaceutical company which
licensed certain patent rights relating to citicoline to the Company, requiring
the Company to purchase from Ferrer citicoline bulk compound for commercial
purposes at fixed prices, subject to certain conditions. To date, Ferrer's
manufacturing facility has not been inspected by the FDA for a U.S. marketed
product, but is expected to undergo such an inspection in conjunction with the
FDA's review of the CerAxon NDA submitted by the Company. There can be no
assurance the Company can or will establish on a timely basis, or maintain,
manufacturing capabilities of bulk compound or finished product required to
obtain regulatory approval or that any facilities used to produce citicoline
will have complied, or will be able to maintain compliance, with GMP. See "Risk
Factors -- Uncertainties Relating to CerAxon" and "Funding Requirements".

                                                                                
                                       14

<PAGE>

     Licensing and Proprietary Rights: In January 1993, the Company licensed
exclusive marketing and manufacturing rights based on certain patent rights
relating to the use of citicoline, including certain patent and know-how rights
in the U.S. and know-how rights in Canada, from Ferrer. The compound citicoline
is not covered by a composition of matter patent. The licensed U.S. patent
covering the administration of citicoline to treat patients afflicted with
certain conditions associated with the inadequate release of brain acetylcholine
expires in 2003. As described in the licensed U.S. patent, the inadequate
release of acetylcholine may be associated with several disorders, including the
behavioral and neurological syndromes seen after brain traumas and peripheral
neuro-muscular disorders, and post-stroke rehabilitation. Although the claim of
the licensed patent is broadly directed to the treatment of inadequate release
of brain acetylcholine, there can be no assurance this patent will afford
protection against competitors of CerAxon to treat ischemic stroke. In addition
to any proprietary rights provided by this patent, the Company expects to rely
on certain marketing exclusivity regulations of the FDA. 

     In December 1997, the Company received a notice of allowance of claims
pending in a patent application relating to the use of citicoline as a
neuro-protectant. Additional domestic and international patent applications have
been filed by the Company. See "Patents and Proprietary Rights", "Government
Regulation" and "Agreements - CerAxon."

Pagoclone

     Pagoclone is under development by the Company as a drug to treat
panic/anxiety disorders. These disorders are believed to be related to excess
activity of certain neurons, resulting from the decreased action of the
neurotransmitter GABA (gamma amino butyric acid). The Company believes that
pagoclone increases the action of GABA, thus reducing excess neuronal activity
and alleviating symptoms of panic and anxiety. Pre-clinical and early clinical
data suggest that pagoclone may offer advantages over traditional benzodiazepine
anti-anxiety agents, including reduced drowsiness, lower addiction and
withdrawal potential and less potential for alcohol interactions.

     Current pharmacological treatments for anxiety and panic disorders include
serotonin agonists such as BuSpar, and benzodiazepines, such as Valium and
Xanax, as well as the serotonin reuptake inhibitor, Paxil, approved for the
treatment of panic disorders. Serotonin agonists have been shown to have limited
effectiveness in treating anxiety and panic disorders. Although benzodiazepines
help to regulate GABA in the brain, they may cause side effects such as
sedation, hangover, dizziness and tolerance with continuing use and have the
potential for addiction. In addition, the sedative/hypnotic effects of
benzodiazepines are generally increased by alcohol intake, which may lead to
serious side effects that may include coma.

     In November 1997, the Company announced that data from a pilot study among
16 patients suffering from panic attacks showed that those who were treated with
three doses per day, orally, of pagoclone experienced a marked reduction in the
number of their panic attacks compared to those who received placebo. This
double-blind, placebo controlled crossover study was conducted by a team of
researchers in the U.K. Pagoclone produced a significant reduction (40 percent,
p=0.012) in the total number of panic attacks over a two week treatment period
and a reduction (40 percent, p=0.006) in the average number of panic attacks per
day compared to

                                                                           
                                       15

<PAGE>

the pre-treatment period. No significant change in the total number of
panic attacks was observed during placebo treatment.

     In November 1996, the Company initiated its first Phase 2/3 trial of
pagoclone in patients suffering from panic disorder. The Company designates a
trial as Phase 2/3 if it is a well-controlled trial which the Company may
utilize, depending upon results, as either a pivotal or supporting trial in an
NDA submission. This national, multi-center dose-response trial will eventually
include an estimated 280 patients and will compare the effects of three doses of
pagoclone to placebo in treating panic disorder during a 10-week period. As of
December 18, 1997, 221 patients had been enrolled. Primary outcome measures will
include the frequency and severity of panic attacks experienced by patients.

     In 1994, the Company licensed from RPR exclusive worldwide rights to
pagoclone, in exchange for licensing, milestone and royalty payments to RPR. See
"Patents and Proprietary Rights." The Company currently intends to seek to
sublicense marketing rights to this product.

 LidodexNS

     In December 1996, the Company and Algos entered into an agreement for the
development and commercialization of LidodexNS, a combination of lidocaine and
the N-methyl-D-aspartate antagonist, dextromethorphan, that may offer the
potential for rapid and prolonged relief of acute migraine headache through
intranasal administration. A significant unmet need among patients suffering
from acute migraine headache is acute relief and treatment of the severe initial
"break-through" pain associated with migraine.

     The agreement establishes a multi-stage development collaboration between
Algos and Interneuron and licenses to Interneuron rights, co-exclusive with
Algos, to manufacture and market the combined agent. This collaboration will
include certain pre-clinical studies, clinical trials and regulatory review
activities overseen by a joint steering committee and, assuming regulatory
approval, sharing the marketing and profits of LidodexNS.

     Results of an 81-patient trial (Journal of the American Medical
Association, Vol. 276, No. 4, July 24/31, 1996) showed that intranasal lidocaine
relieved headache pain in 55% of patients with migraine, with relief usually
occurring within five minutes but with relapse occurring commonly and early
after treatment. Pre-clinical studies with dextromethorphan suggest that the
LidodexNS combination may improve the potency and duration of action of
lidocaine.

     The Company is completing pre-clinical studies in support of an IND and
anticipates filing an IND in 1998 pending successful completion of toxicological
studies.


Other Potential Products

     During 1997, the Company obtained an exclusive option to license a product
for the treatment and prevention of liver diseases. The option grants
Interneuron the right to license, on specified terms, North American and Asian
marketing rights to an issued U.S. patent and pending international patents,
following

                                                                           
                                       16

<PAGE>

Interneuron's review of future clinical data. This orally-administered compound
is being studied in a large U.S. government-sponsored Phase 3 study. Several
hundred patients have been enrolled in the study, which is expected to be
completed in 2 1/2 to 3 years. The study is designed to have periodic interim
analyses which could lead to earlier termination if a significant positive drug
effect is identified.

     During 1997, the Company also obtained an exclusive option to acquire, on
specified terms, a private company engaged in development of a product in a
Phase 1 clinical trial which may have application for diabetes and related
disorders.


THE SUBSIDIARIES

INTERCARDIA, INC.

     Overview

     Intercardia, a majority-owned subsidiary of Interneuron, was formed in 1994
and completed its initial public offering in February 1996. Intercardia focuses
on the discovery and development of therapeutics for the treatment of
cardiovascular and pulmonary disease, as well as earlier stage technology in
other areas.

     Bextra (bucindolol)

     Through Intercardia, the Company is developing Bextra (bucindolol), a drug
in Phase 3 clinical trials for the treatment of congestive heart failure
("CHF"), a syndrome of progressive degeneration of cardiac function which is
generally defined as the inability of the heart to pump sufficient volume of
blood for proper functioning of vital organs. CHF is caused by a number of
conditions that produce a primary injury or stress to the heart muscle.
Regardless of the cause of the primary damage, the body will activate
compensatory mechanisms in an attempt to maintain cardiac output. These
mechanisms include activation of the cardiac adrenergic systems resulting in
stimulation of beta-adrenergic receptors on cells located in the heart and
vascular system. Chronic stimulation of these receptors is believed to
contribute to the continual worsening of cardiac function and high mortality.

     Intercardia licensed worldwide rights to Bextra through its 80% owned
subsidiary, CPEC, Inc. ("CPEC") (the remaining 20% of which is owned by
Interneuron). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Originally developed by Bristol-Myers Squibb Company
("BMS") and licensed by BMS to CPEC in exchange for royalties based on sales,
bucindolol is a non-selective beta-blocker with mild vasodilating properties
that works by blocking beta- adrenergic receptors on cells located in the heart
and vascular system. The Company believes that vasodilating beta-blockers such
as bucindolol possess potential advantages over earlier beta blockers and
represent a promising approach to the treatment of CHF. Bextra is expected to be
used in addition to other drugs for the treatment of CHF.

                                                                                
                                       17

<PAGE>

     Coreg (carvedilol), also a vasodilating non-selective beta-blocker, owned
by Boehringer Mannheim GmbH and licensed in the U.S. and certain other countries
to SmithKline Beecham PLC, was approved by the FDA in May 1997 and is currently
marketed in the U.S. for the treatment of CHF. Carvedilol has been approved for
the treatment of CHF in approximately 15 countries, including the U.S. and
Canada. See "Competition."

     The U.S. composition of matter patent on bucindolol expired in November
1997. Assuming FDA approval is obtained, Intercardia intends to pursue up to
five years' market exclusivity under the Drug Price Competition and Patent Term
Restoration Act of 1984 (commonly referred to as the Waxman-Hatch Act).
Intercardia also intends to seek to enhance its competitive position with Bextra
by developing a once-daily formulation and is conducting studies with Jago
Pharma AG designed to determine the feasibility of developing a once-daily
formulation. See "Government Regulation" and "Risk Factors - Uncertainty
Regarding Waxman Hatch Act." Intercardia may seek additional partners for the
development and marketing of this formulation.

     BEST Study: A Phase 3 clinical trial began in June 1995 among patients with
CHF, to test whether the addition of bucindolol to optimal therapy for CHF will
reduce mortality in patients with moderate to severe CHF. Known as BEST
(Beta-blocker Evaluation of Survival Trial), the bucindolol study is being
conducted by the National Institutes of Health ("NIH") and the Department of
Veterans Affairs ("VA"). The BEST study is designed to include up to 2,800
patients (of which at least 33% are recommended to be female), having moderate
to severe symptoms (NYHA classes III and IV), at approximately 90 clinical
centers throughout the U.S. and Canada. As of November 30, 1997, approximately
2,070 patients have been enrolled in the BEST study. All patients are expected
to receive a minimum follow-up of 18 months or more, giving a potential maximum
duration for the study of approximately four and one half years. The study is
designed so that in the event that significant mortality improvement is evident
to an independent Data and Safety Monitoring Board during the course of the
study, the study could be stopped early. See "Risk Factors - Uncertainties
Generally Related to Clinical Trials."

     The NIH and VA have committed up to $15,750,000 primary funding for BEST,
with specific levels of NIH/VA funding to be based upon patient enrollment
milestones. Intercardia has agreed to commit up to $2,000,000 over the course of
the study (of which $1,750,000 has been paid as of September 30, 1997), in
addition to supplying the drug and providing monitoring services estimated to
cost an additional $2,500,000.

     Bextra Marketing: In December 1995, Intercardia entered into an agreement
with Astra Merck for the development, commercialization and marketing in the
U.S. of a twice-daily formulation of bucindolol for the treatment of CHF. Under
the agreement, Astra Merck made a $5,000,000 initial payment to Intercardia and
agreed to fund up to $15,000,000 of U.S. development costs for the twice-daily
formulation of bucindolol, including Intercardia's costs related to the BEST
study. Astra Merck obtained the right to market a twice daily formulation of
bucindolol, with Intercardia retaining certain copromotion rights. Astra Merck
agreed to make milestone payments to Intercardia upon FDA approval, except under
certain conditions, and the achievement of specified levels of sales. CPEC is
entitled to royalties of 15% of the first $113,000,000 of annual net sales and
30% of annual net sales above $113,000,000, adjusted for inflation, and Astra
Merck agreed to pay royalties due BMS. Intercardia and CPEC paid Astra Merck

                       
                                       18

<PAGE>

an aggregate of $10,000,000 in December 1997 (of which a portion was paid by
Interneuron, reflecting its percentage ownership interest in CPEC, as a loan to
CPEC) and CPEC and/or Intercardia has agreed to reimburse one-third of the
product launch costs through the first 12 months of commercial sales, up to a
total launch cost reimbursement of $11,000,000. In the event these payments are
not made, the royalty payable by Astra Merck declines to 7% of net sales. See
"Agreements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

     In December 1996, Intercardia entered into an agreement with Knoll ("the
Knoll Collaboration") relating to the development, manufacture and marketing of
bucindolol for the treatment of CHF in all countries with the exception of the
U.S. and Japan (the "Territory"). The Knoll Collaboration relates to both the
twice-daily bucindolol formulation and the once-daily bucindolol formulation
currently under development. Under the terms of the Knoll Collaboration, Knoll
made total payments to CPEC of $3,480,000 in fiscal 1997 which were recognized
as contract and license fee revenue. Knoll agreed to make future payments to
CPEC upon the achievement of product approval and sales milestones.

     Intercardia and Knoll agreed to share the development and marketing costs
of bucindolol in the Territory. In general, Knoll agreed to pay approximately
60% of the development and marketing costs prior to product launch, and
Intercardia agreed to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. CPEC will be entitled to a royalty equal to 40% of
net profits, as defined in the Knoll Collaboration, and would be responsible
for, and pay to Knoll, 40% of any net loss, as defined.

     Proposed Transcell Acquisition

     On November 5, 1997, Intercardia, Interneuron and Transcell, a
majority-owned subsidiary of Interneuron, executed a letter of intent ("Letter
of Intent") relating to the proposed acquisition by Intercardia of Transcell and
certain related technology rights owned by Interneuron (the "Proposed Transcell
Acquisition") in exchange for Intercardia common stock with an aggregate market
value as of November 5, 1997 of approximately $15,000,000 and the issuance of
options to purchase Intercardia common stock to Transcell employees and
consultants, with an aggregate market value as of November 5, 1997 of
approximately $3,000,000 to $4,000,000. Under the terms of the Letter of Intent,
the purchase price will be paid in three installments. The first installment,
representing approximately $6,000,000 as of November 5, 1997, will be made upon
closing the transaction (the "Closing"). The number of shares of Intercardia
common stock to be received by Transcell stockholders at the Closing will be
determined by Intercardia's stock price during the week prior to Closing. The
minimum Intercardia stock price to be used for determining the number of shares
to be issued for the initial installment will be $19.00 per share and the
maximum will be $25.00 per share. The second and third installments will each
consist of approximately $3,000,000 of Intercardia common stock, as valued at
each date, and will be issued 15 and 21 months after Closing. The purchase price
includes $3,000,000 of Intercardia common stock (subject to the price range
described above) to be issued to Interneuron at Closing in exchange for the
transfer by Interneuron to Intercardia of certain license and technology rights,
and for Interneuron's continuing guarantee of certain of Transcell's lease
obligations. Intercardia will also pay Interneuron a royalty on certain products
that may result from a research collaboration originally entered into among
Transcell, Interneuron and Merck. The Proposed Transcell Acquisition is subject
to final due diligence, execution

                                                                             
                                       19

<PAGE>

of definitive agreements and approval by Transcell and Intercardia stockholders.
In connection with the Proposed Transcell Transaction, Intercardia and
Interneuron will incur charges to operations during the period in which the
Closing occurs currently estimated to range from approximately $6 to $8 million
and will incur additional future charges relating to certain stock options to be
issued pursuant the Proposed Transcell Transaction. The Company will allocate a
portion of such charges to minority interest. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

     Early-Stage Programs

     Intercardia has established and may establish additional subsidiaries in
specific areas. Intercardia's 66%-owned subsidiary, Aeolus Pharmaceuticals, Inc.
is focused on the preclinical development of antioxidant small molecules. These
compounds target diseases involved with toxicities associated with excess oxygen
free radicals including neonatal respiratory distress syndrome.

     In September 1997, Intercardia acquired approximately 80% of Renaissance
Cell Technologies, Inc. ("Renaissance") for $500,000. Renaissance is an early
stage company conducting research in the area of hepatic stem cells. Renaissance
entered into an agreement with the University of North Carolina at Chapel Hill
("UNC") to sponsor research on hepatic stem cells in exchange for an option to
an exclusive license to products resulting from the research. Renaissance has
agreed to pay the UNC an amount not to exceed $450,000 per year for a minimum of
two years.

         Clayton I. Duncan is President and Chief Executive Officer of
Intercardia, which had 18 full-time employees as of September 30, 1997. As of
September 30, 1997, Interneuron owned approximately 61% of the outstanding
common stock of Intercardia, and approximately 51% on a fully diluted basis. In
certain circumstances, Interneuron has the right to purchase additional shares
of Intercardia common stock at fair market value so that Interneuron's equity
ownership in Intercardia does not fall below 51%. It is expected that
Interneuron will continue to own a majority of the outstanding common stock of
Intercardia upon completion of the proposed Transcell acquisition.

TRANSCELL TECHNOLOGIES, INC.

     Transcell is a majority owned subsidiary of Interneuron engaged in research
and development of core drug discovery technologies in the field of
combinatorial carbohydrate chemistry. Transcell's core technology is directed
toward drug discovery based on the chemical synthesis of complex carbohydrate
compounds known as oligosaccharides and glycoconjugates. Transcell has
exclusive, worldwide licenses to certain of its core technologies from Princeton
University, where Daniel Kahne, Ph.D., and Suzanne Walker-Kahne, Ph.D.,
consultants to Transcell, performed Transcell's founding scientific research.

     Transcell's technology is focused primarily on drug discovery, which
involves methods of synthesizing oligosaccharides, or carbohydrate molecules,
for therapeutic use. Oligosaccharides are present on all cell surfaces and, in
different configurations, are integral to virtually all inter-cellular
reactions, including viral, bacterial and immune system interactions. This
technology is also directed toward adding carbohydrate components to existing
molecules to make glycoconjungates to improve the overall efficacy and toxicity

                               
                                       20

<PAGE>

profile of the parent compound. The Company believes this novel carbohydrate
synthesis technology may reduce the obstacles associated with traditional
methods for making carbohydrates, such as lack of specificity, low yields and
relatively long production periods, producing unique libraries of
oligosaccharide compounds and glycoconjugates more efficiently and in fewer
steps, with both solution and the solid phase methods.

     Transcell is applying this technology to produce libraries of carbohydrates
and glycoconjugates for screening as drug candidates. Transcell's combinatorial
chemistry approach in this area is based upon investigating the synthesis of
both random libraries of carbohydrates and carbohydrates directed to a specific
therapeutic target. Transcell has rights under several patents and patent
applications that are pending in the U.S. and several foreign jurisdictions and
which cover various aspects of the synthesis of oligosaccharides. Two U.S.
patents have issued and a Notice of Allowance has been received for a third
patent application relating to this technology.

     Merck Agreement: On July 7, 1997, Transcell, Interneuron and Merck entered
into a Research Collaboration and License Agreement (the "Merck Agreement")
relating to the discovery, development and commercialization of novel
antibacterial agents. The initial focus of this collaboration will be the
discovery and biological evaluation of analogues of anti-bacterial compounds
selected from two distinct structural classes and the license to Merck of any
products arising out of the two research programs. Transcell agreed to utilize
its combinatorial technologies to prepare libraries of carbohydrate derivative
compounds for biological evaluation and further development. Merck has an option
to extend the field of the collaboration and license to include all
antibacterial pharmaceutical products.

     Under the Merck Agreement, Transcell received from Merck an initial
licensing payment and Merck agreed to provide research support over two years.
In addition, Merck agreed to provide additional payments based upon the
achievement of defined milestones for each program. While there is no assurance
these milestones will be reached, these additional payments, combined with the
initial licensing payment and research support, could total approximately
$48,000,000 if products from both programs were approved by the FDA. In
addition, Merck agreed to pay royalties on net sales of any products that may be
developed based on the research programs.

     Certain of the rights licensed to Merck are based on exclusive licenses or
rights held by Transcell and Interneuron from Princeton University, which will
be entitled to varying percentages of certain payments and royalties received
from Merck.

     At September 30, 1997, Interneuron owned approximately 79% of the
outstanding common stock of Transcell and Transcell had 32 full-time employees.

INTERNUTRIA, INC.

     In April 1995, Interneuron formed InterNutria to develop and market
nutritional products for the dietary management of medical and non-medical
conditions. InterNutria's product strategy is based on initial research
conducted at MIT by scientific founder Judith Wurtman, Ph.D., which examined the
connection between food, behavior and the brain, and how modifications of food
intake can enhance the

                                                                             
                                       21

<PAGE>

synthesis and release of certain neurotransmitters and thus enhance control over
behavior, performance and disease states.

     InterNutria's strategy is to acquire, develop and commercialize dietary
supplements and other proprietary nutritional products that are clinically
evaluated and regulated pursuant to the Dietary Supplement Health Education Act
of 1994 ("DSHEA") for the dietary management of physiological processes. The
marketing of InterNutria's products is consumer-oriented. See "Government
Regulation."

PMS Escape

     In November 1995, InterNutria acquired technology, including a patent
application and know-how, from AVAX Technologies, Inc., formerly Walden
Laboratories, Inc. ("AVAX"), relating to InterNutria's first product, PMS
Escape, in exchange for $2,400,000 payable in two installments of Interneuron
Common Stock, the first in late 1996 and the second in late 1997, at the
then-prevailing market price. Certain affiliates of Interneuron are or were
stockholders of AVAX but will not receive any of the purchase price. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     PMS Escape, a dietary supplement for women with pre-menstrual syndrome, is
a powdered beverage mix that contains a special formulation of natural
carbohydrates specifically designed to help manage the normal emotional and
appetite changes associated with PMS. In October 1996, InterNutria expanded a
regional test launch of PMS Escape in New England, where the product was
available at certain retail outlets, while continuing clinical evaluation of the
product. The New England test market area was expanded in March 1997 to the
middle Atlantic states. A national rollout of PMS Escape began in September
1997. InterNutria currently has an approximately 43-person sales force, retained
on a contract basis, targeting obstetricians and gynecologists, as well as
retail accounts. In addition, Interneuron's sales force, numbering approximately
25, is currently under contract to InterNutria in connection with the national
marketing of PMS Escape. Any broader commercial marketing, including
distribution and order fulfillment, is similarly expected to be conducted on a
contract basis.

Other Products

     InterNutria is developing a line of sports drinks as dietary supplements
for enhancement of athletic performance, reduction of fatigue and prevention of
dehydration which InterNutria test launched on a targeted basis in fiscal 1998.
These products include ProEnhancer, Race Day and ProHydrator.

     In addition, InterNutria is test marketing Melzone, a dietary supplement
which contains a low dose form of melatonin, a naturally occurring hormone
produced by the pineal gland that may play a key role in regulating the body's
circadian rhythm, or biologic clock. The Company's melatonin is believed to
induce restful sleep while offering advantages over currently available sleeping
aids, many of which may have undesirable side effects, such as amnesia or
"hangover." Although melatonin is available, generally at much higher strengths,
as a dietary supplement in health food stores and other outlets, the Company
believes that lower strengths, which are intended to mimic normal nighttime
levels, and which are manufactured in accordance with good manufacturing
practices, can offer an innovative inducement of sleep with a reduced risk of
adverse side effects that may be associated with higher doses.

     Regional test-marketing of Melzone began in December 1996 in the greater
Boston area as a dietary supplement containing 0.3 milligram of melatonin for
inducing a normal sleep. This product is based upon research leading to a patent
licensed by the Company from MIT in September 1995 that covers the use of

                                                                                
                                       22

<PAGE>

low dose amounts (less than one milligram) of melatonin for the induction of
sleep, in exchange for royalties based on sales.

     James F. Pomroy is Chairman and Chief Executive Officer and Lewis D. Lepene
is President of InterNutria, which had six full-time employees as of September
30, 1997. As of September 30, 1997, Interneuron owned 100% of the outstanding
capital stock of InterNutria. In October 1997, Interneuron agreed to sell an
aggregate of 10% of its InterNutria common stock to four executive officers of
Interneuron for nominal consideration.

PROGENITOR, INC.

     Overview: Progenitor was formed in February 1992 and completed its initial
public offering in August 1997. Progenitor is engaged in the discovery and
functional characterization of genes to identify and validate targets for the
development of new pharmaceuticals. Progenitor's initial focus is on the
identification of genes important in cancer, blood and immune system disorders
and inherited diseases. Progenitor develops and plans to commercialize its
discoveries through partnerships with biopharmaceutical firms.

     Technology: Progenitor's genomics system focuses on understanding gene
function in order to accelerate the discovery of genes with medical relevance.
The system combines core expertise in the fields of developmental biology, human
disease genetics and bioinformatics , using developing systems and rigorously
screened patient populations as unique discovery resources. Developmental
biology provides access to fundamental genes involved in cell growth and
specialization, while disease genetics methods facilitate evaluation of
developmental genes, and provide disease-associated genes for functional
characterization through developmental biology. Progenitor's bioinformatics
capabilities and integrated genomics technologies are used to capture, integrate
and analyze data generated through its genomics system, and data from additional
sources. Progenitor's current programs include gene discovery and
characterization in asthma, cancer and blood vessel formation, and development
of bioinformatics databases and tools.

     Initial Public Offering: In August 1997, Progenitor completed an initial
public offering (the "Progenitor IPO") of 2,875,000 units, at $7.00 per unit,
each unit consisting of one share of Progenitor common stock and one five-year
warrant to purchase one share of Progenitor common stock at $10.50 per share.
The Progenitor IPO resulted in proceeds to Progenitor, net of offering-related
costs, of approximately $17,200,000. Interneuron purchased 500,000 units of the
Progenitor IPO for a total of $3,500,000. Concurrently with the Progenitor IPO,
Progenitor (i) sold 1,023,256 shares of Progenitor common stock to Amgen
pursuant to a stock purchase agreement for a purchase price of $4,500,000 in
cash and a $1,000,000 promissory note and (ii) completed the acquisition (the
"Mercator Acquisition") of Mercator Genetics, Inc., a privately held genomics

                      
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<PAGE>

company, ("Mercator") for an aggregate purchase price of approximately
$24,000,000, including related transaction costs, paid with the issuance of
approximately 3,443,000 shares of Progenitor common stock, plus the assumption
of Mercator liabilities, forgiveness of debt relating to advances made by
Progenitor to Mercator and the issuance of stock options and warrants. As a
result of the Mercator Acquisition, the Company incurred approximately
$7,800,000 of charges to operations in the fourth quarter and fiscal year ended
September 30, 1997 relating to Interneuron's share in Progenitor's charge for
acquired in-process research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

     Amgen Agreement: In December 1996, Progenitor entered into an agreement
with Amgen (the "Amgen Agreement"), granting Amgen certain exclusive rights for
the development and commercialization of products using Progenitor's leptin
receptor technology. Amgen paid Progenitor a $500,000 initial license fee in
fiscal 1997. Progenitor may also receive from Amgen certain development and
regulatory milestone payments and potential royalties on sales. As provided by
the Amgen Agreement, Amgen purchased Progenitor common stock concurrently with
the Progenitor IPO.

     Principal Genomics Discoveries

     HFE Hereditary Hemochromatosis Gene/SBCL Agreement: In September, 1997,
Progenitor entered into an agreement with SBCL granting SBCL exclusive rights to
develop and perform in the U.S. and several international markets clinical
laboratory diagnostic testing for hereditary hemochromatosis (HH) under
Progenitor's patent applications covering the HFE gene and its specific
mutations. Hereditary hemochromatosis is a common inherited iron overload
disease that allows various organs in the body to absorb and accumulate too much
iron. Under the agreement, Progenitor will receive annual fees as well as
payments on a per test basis.

     B219 Leptin Receptor/Amgen Agreement: Abnormalities in the expression of
the protein hormone leptin and in the function of the receptor for leptin have
been implicated in obesity, diabetes and other metabolic disorders. Progenitor
has applied its proprietary receptor discovery technology, its system for gene
expression analyses, and its murine developmental tissue resources to identify
gene sequences that encode various forms of the B219 leptin receptor. In July
1997, Progenitor received one issued patent for claims relating to genes
encoding the leptin receptor. Progenitor also has received two notices of
allowance for claims relating to genes encoding the leptin receptor, and for a
disease-associated leptin receptor variant and a method for detecting this
variant. In December 1996, Progenitor licensed certain aspects of its leptin
receptor technology to Amgen for human therapeutic, diagnostic and prophylactic
uses. Progenitor has retained exclusive rights to the leptin receptor technology
for certain other uses.

     Del-1 Gene: Drugs designed to inhibit the growth of new blood vessels
represent a therapeutic approach to treating cancer. Progenitor, in
collaboration with Vanderbilt University, discovered the
developmentally-regulated endothelial locus-1 ("del-1") gene, which encodes a
protein (Del-1) involved in the early growth and development of blood vessels
and bone. Since del-1 is not expressed in most normal adult tissues, and the
del-1 protein is accessible in the lining of blood vessels, Del-1 shows promise
as a highly specific, accessible and stable target for the development of cancer
therapeutics, diagnostics and imaging agents. Interneuron owns an option to
acquire an exclusive license to manufacture, use and sell certain aspects of
Del-1. Subject to such option, Progenitor is seeking collaborators to pursue
research, development and commercialization of del-1 and Del-1.


               
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<PAGE>

     Additional Programs: In March 1995, Progenitor entered into an agreement
with Chiron for the potential development and commercialization of Progenitor's
T7T7 gene delivery system for selected applications. In May 1995, Progenitor
entered into a research, development and commercialization agreement with Novo
Nordisk relating to the BFU-e red blood cell growth factor. See "Agreements -
Progenitor Agreements."

     Progenitor's research is at a very early stage and requires significant
additional funds to complete development, conduct pre-clinical and clinical
testing and pursue regulatory review of any potential products. Progenitor is
seeking to enter into additional collaborations or business combinations to
pursue development of its technologies and/or to obtain independent equity
financing. There can be no assurance that Progenitor's efforts to obtain such
additional funding or collaborations will be successful, in which case
Progenitor would be required to reduce or eliminate certain operations.

     Douglass B. Given, M.D., Ph.D. is President and Chief Executive Officer of
Progenitor, which had 47 full-time employees as of September 30, 1997.
Interneuron's ownership in Progenitor's outstanding capital stock decreased from
approximately 76% at September 30, 1996 to approximately 37% at September 30,
1997 (approximately 29% on a fully-diluted basis) principally due to the
Progenitor IPO and the Mercator Acquisition. As a result of the Company's
decreased percentage of ownership in Progenitor, the Company will no longer
consolidate the financial statements of Progenitor but will include Progenitor
in the Company's financial statements using the equity method of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."


MANUFACTURING AND MARKETING

General

     The Company has no manufacturing facilities and limited marketing
capabilities. In general, the Company intends to rely primarily on third parties
for manufacturing and for marketing products requiring broad marketing
capabilities and for overseas marketing. For certain products, including,
CerAxon and InterNutria's dietary supplement products, the Company is conducting
and may
                                                                             
                                       25

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conduct certain marketing or copromotional activities in the United States
directly. Such activities may include a combination of educational programs to
professional audiences, sales force activities or direct advertising and
promotion.

     To the extent the Company enters into collaborative arrangements with
pharmaceutical and other companies for the manufacturing or marketing of
products, these collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development costs, including the
costs of clinical testing necessary to obtain regulatory clearances, and for
commercial-scale manufacturing. These collaborators are expected to be granted
exclusive or semi-exclusive rights to sell specific products on a disease
application or market-specific basis in exchange for a royalty, joint venture,
equity investments, co-marketing or other financial interest. Such collaborative
arrangements could result in lower revenues than if the Company marketed a
product itself.

     In the event the Company establishes its own manufacturing or marketing
capabilities, it may require additional funds for manufacturing, facilities,
equipment and personnel. The Company may seek to market certain products, by
developing its internal sales force or through contract sales representatives,
directly to selected groups of physician specialists likely to prescribe or
recommend the product. In such event, the Company would be responsible for all
costs associated with developing, manufacturing and marketing the product. For
ongoing or planned regional and national launches of dietary supplement
products, including PMS Escape, ProEnhancer, Race Day and ProHydrator, and
Melzone the Company is or will be responsible for these costs.

Redux

     With respect to the marketing and manufacture of Redux, the Company
sublicensed its exclusive U.S. marketing rights to AHP, while retaining
copromotion rights. Redux was launched in June 1996 and withdrawn in September
1997. The Company relied on AHP to target the obesity market and for
distribution and advertising and promotional activities. The Company copromoted
Redux through an approximately 30-person sales force to selected diabetologists,
endocrinologists, bariatricians, nutritionists and weight management
specialists, subject to certain restrictions. Under a contract manufacturing
agreement Boehringer produced on behalf of Interneuron commercial scale
quantities of the finished dosage formulation of Redux in capsule form. See
"Interneuron Products - Redux", "Agreements - Redux Agreements" and "Legal
Proceedings".
                       
                                       26

<PAGE>

CerAxon

         The Company is currently evaluating the commercialization strategy for
CerAxon. Subject to required regulatory approvals, the Company is currently
planning to conduct sole marketing of the product but may consider a combined
marketing strategy which includes contracting with certain companies for the
copromotion of the product and/or establishing a contract salesforce for certain
market segments. The Company expects that it will be required to expand its
sales force by an additional approximately 200 representatives, to hire
additional headquarters-based medical, marketing and administrative support
personnel and to establish distribution arrangements. In the event the Company
markets CerAxon directly, significant funds would be required for manufacturing,
distribution, marketing and selling efforts.

                  The Company is dependent upon third party suppliers of
citicoline bulk compound and finished product for manufacturing in accordance
with the Company's requirements and U.S. Good Manufacturing Practices ("GMP")
regulations. The Company is subject to an agreement with Ferrer requiring the
Company to purchase from Ferrer citicoline bulk compound for commercial purposes
at fixed prices, subject to certain conditions. To date, Ferrer's manufacturing
facility has not been inspected by the FDA for a U.S. marketed product, but is
expected to undergo such an inspection in conjunction with the FDA's review of
the CerAxon NDA submitted by the Company. Further, although the supplies of
citicoline finished product for clinical trials have been obtained from a
contract manufacturer, the Company has not finalized an agreement with such
manufacturer providing for commercial manufacturing and supply of citicoline
finished product and there can be no assurance such agreement can be obtained on
terms favorable to the Company or at all, which could adversely affect the
Company's ability to commercialize CerAxon on a timely or cost-effective basis.
There can be no assurance the Company can or will establish on a timely basis,
or maintain, manufacturing capabilities of bulk compound or finished product
required to obtain regulatory approval of CerAxon or that any facilities used to
produce citicoline will have complied, or will be able to maintain compliance,
with GMP. See "Risk Factors -- Uncertainties Relating to CerAxon" and "Funding
Requirements".

Bextra

     Intercardia has an agreement with Astra Merck for the U.S. development and
marketing of bucindolol. A steering committee consisting of representatives of
Intercardia and Astra Merck will select a third party manufacturer for
bucindolol for the U.S. Astra Merck agreed to conduct sales and marketing of
bucindolol in the U.S., with Intercardia retaining co-promotion rights. See
"Agreements - Intercardia Agreements."

     Intercardia has entered into an agreement with Knoll for the international
development and commercialization of bucindolol. Territory covered by this
agreement includes all countries except the U.S. and Japan. Intercardia will be
responsible for 40% of development and marketing costs and will receive 40% of
net profits, or pay 40% of net losses, as defined in the agreement.
Additionally, Knoll made approximately $3 million in payments up front and will
make payments of up to $20 million upon reaching specific regulatory approval
and sales milestones.

COMPETITION
                       
                                       27

<PAGE>

General

     The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical companies and specialized biotechnology companies, are
engaged in research and development of technologies and therapies similar to
those being pursued by the Company. Many of the Company's competitors have
substantially greater financial and other resources, larger research and
development staffs and, unlike the Company, have significant experience in
pre-clinical testing, human clinical trials and other regulatory approval
procedures.

     In the event the Company markets any products directly, it will compete
with companies with well-established distribution networks and market position.
See "Manufacturing and Marketing" and "Government Regulation."

     There can be no assurance that products under development or introduced by
others will not render the Company's products or potential products obsolete or
uneconomical or result in treatments or cures superior to any therapy developed
by the Company or that any therapy developed by the Company will be preferred to
any existing or newly developed products or technologies. Other companies may
succeed in developing and commercializing products earlier than the Company
which are safer and more effective than those proposed for development by the
Company. Further, it is expected that competition in these fields will
intensify. Colleges, universities, governmental agencies and other public and
private research organizations continue to conduct research and are becoming
more active in seeking patent protection and licensing arrangements to collect
royalties for use of technology that they have developed, some of which may be
directly competitive with those of the Company. In addition, these institutions
may compete with the Company in recruiting highly qualified scientific
personnel. The Company expects technological developments in its fields of
product development to occur at a rapid rate and expects competition to
intensify as advances in these fields are made. Accordingly, the Company will be
required to continue to devote substantial resources and efforts to research and
development activities.

CerAxon

     Activase, a genetically engineered version of the naturally occurring
tissue plasminogen activator (t- PA), is marketed by Genentech, Inc. for the
treatment of acute ischemic stroke within three hours of symptom onset. Activase
is the first therapy to be indicated for the management of stroke. A number of
other drugs in clinical trials are also being developed for this indication,
including Prosynap (lubeluzole) by Janssen Pharmaceutical NV. and Boehringer
Ingelheim GmbH. Although, to the Company's knowledge, an NDA for Prosynap was
filed with the FDA, an FDA advisory committee hearing scheduled to review the
drug was recently cancelled. Based on existing clinical data on CerAxon, the
Company believes CerAxon may be an attractive post-stroke therapy, particularly
in patients with moderate to severe strokes, due to its potentially broader,
24-hour post-stroke therapeutic window.

     Bextra

     The cardiovascular drug market is highly competitive with many drugs
marketed by major multi-national and integrated pharmaceutical companies having
substantially greater technical, marketing and financial resources than
Intercardia. In particular, Coreg (carvedilol), a non-selective beta-blocker
with vasodilating properties owned by Boehringer Mannheim GmbH and licensed in
the U.S. and certain other countries to SmithKline Beecham, has been launched by
SmithKline Beecham following its approval by the FDA in May 1997 with a claim
"to reduce the progression of disease as evidenced by cardiovascular death,
cardiovascular hospitalization, or the need to adjust other heart failure
medications." Since 1991, carvedilol has been approved as a treatment for
hypertension in several European countries, and in September 1995, it was
approved by the FDA for commercial marketing in the U.S. as a twice-daily
treatment for hypertension. The Company is aware that carvedilol has been
approved for the treatment of CHF in approximately 15 countries. Beta-blockers
have not historically been accepted by the medical community to treat congestive
heart failure, and substantial educational efforts may be required to convince
physicians of the therapeutic benefits of bucindolol notwithstanding its action
as a beta-blocker. The Company is also aware of other drugs and devices under
development for the treatment of heart failure. German-based Merck KGaA is
testing bisoprolol, a beta-1 selective beta-blocker marketed in the U.S. by
Lederle, a division of AHP, for hypertension, as a treatment in CHF patients in
Europe. The

                           
                                       28

<PAGE>

Company believes that Astra AB has initiated a large mortality study for the
beta-1 selective beta-blocker metoprolol.

Pagoclone

     Current therapy for anxiety generally includes the prescription of
bezodiazepine-class and serotonergic compounds. In addition, the Company is
aware of competitors which market certain prescription drugs for indications
other than anxiety who are planning to seek an expansion of labeling to include
anxiety as an indication. The Company believes it is likely there are also
several compounds for anxiety that are in an early stage of preclinical or
clinical development.

AGREEMENTS

Redux Agreements

     AHP Agreements: In November 1992, the Company entered into a series of
agreements (the "AHP Agreements") which granted American Cyanamid Company the
exclusive right to manufacture and market dexfenfluramine in the U.S. for use in
treating obesity associated with abnormal carbohydrate craving, with the Company
retaining copromotion rights. In 1994 AHP acquired American Cyanamid Company.
The agreement is for a term of 15 years commencing on the date dexfenfluramine
is first commercially introduced by AHP, subject to earlier termination.

     Under the AHP Agreements, AHP purchased preferred stock of the Company for
an aggregate purchase price of $3,500,000. As of September 30, 1997, AHP owned
shares of Interneuron preferred stock convertible into an aggregate of 622,222
shares of Common Stock. The agreement requires AHP to reimburse the Company for
50% of certain expenditures related to clinical development, Phase 4 studies and
market surveillance for abuse potential.

                              
                                       29

<PAGE>

     The AHP Agreements provide for base royalties to the Company of 11.5% of
AHP's net sales (equal to the royalty required to be paid by the Company to
Servier) and for "additional" royalties, the applicable rates of which during
fiscal 1997 ranged from 5% of the first $50,000,000 of net sales to 10% of net
sales over $150,000,000.

     The Company also agreed to sell to AHP and AHP agreed to purchase from the
Company for five years from commercial introduction of dexfenfluramine all of
AHP's requirements for dexfenfluramine in bulk chemical form at a purchase price
equal to the price required to be paid by the Company to Servier.

     AHP has the right to terminate its sublicense upon 12 months notice to the
Company. The AHP Agreements provide that Servier has the right to withdraw its
consent to the sublicense in the event that any entity acquires stock in AHP
sufficient to elect a majority of AHP's Board of Directors or otherwise obtains
control of AHP, provided that no such termination shall occur if AHP or its
successor achieves minimum net sales of $75,000,000 in the first marketing year
or $100,000,000 thereafter or pays Servier amounts it would have been entitled
to if AHP had achieved such minimum net sales. Servier consented to the AHP
acquisition of American Cyanamid Company.

     The AHP Agreement provides that AHP could continue to market Pondimin but
agreed that so long as Redux remains commercially viable, AHP will differentiate
Redux for promotional and marketing purposes and will not promote or market
Pondimin or any other product for the anti-obesity indication which competes
directly with Redux in a manner which negatively affects the future market for
Redux.

     Effective June 1996 the Company entered into a three year copromotion
agreement with Wyeth-Ayerst (the "Copromotion Agreement"). The agreement
provides for Interneuron to promote Redux to certain diabetologists,
endocrinologists, bariatricians and weight management specialists, subject to
certain restrictions, and receive payments from AHP for a portion of the
Company's actual costs for up to 33 salespersons during the first and second
years. Under the Copromotion Agreement, Interneuron was entitled to varying
percentages of profit derived from sales generated by its sales force, after
deducting costs, including cost of product revenue, royalties to Interneuron,
and Interneuron's proportionate share of advertising and promotion costs. Under
the Copromotion Agreement, Interneuron agreed, if requested by AHP, to promote
other products of Wyeth-Ayerst that fit within the physician specialists
targeted by Interneuron's sales force. Interneuron's Redux sales force cannot
promote another company's products except under certain conditions. The
Copromotion Agreement may be terminated by Wyeth-Ayerst under certain conditions
including if sales generated by Interneuron do not exceed a specified level per
year. Interneuron is able to terminate the agreement at any time on six month's
notice.

     Under certain circumstances, the Company is required to indemnify AHP, and
the Company is entitled to indemnification by AHP against certain claims,
damages or liabilities incurred in connection with Redux. The cross
indemnification between the Company and AHP generally relates to the activities
and responsibilities of each company. See "Risk Factors -- Risks Relating to
Withdrawal of Redux and Legal Proceedings".

     During fiscal 1997, the Company entered into agreements with AHP and
Servier for the development and commercialization in the U.S. of a sustained
release, once-a-day form of Redux. Interneuron paid

                               
                                       30

<PAGE>

Servier $2,000,000 in connection with the signing of the agreement. Following
the withdrawal of Redux, this program has been discontinued. Under terms of the
agreement between Interneuron and AHP, these two companies were to have shared
the costs of clinical development, including Phase 3 clinical trials and related
studies, and costs of submitting an NDA for a once-a-day formulation of Redux.

     Servier Agreements: The Servier Agreements, entered into in February 1990
and as subsequently amended, grant the Company an exclusive right to market
dexfenfluramine in the U.S. to treat obesity associated with abnormal
carbohydrate craving for a term of 15 years from the date dexfenfluramine is
first marketed in the U.S. The agreements provide for royalties of 11.5% of net
sales, with certain required minimum royalties. The license includes rights to
Servier's Redux trademark.

     Servier has the right to terminate the license agreement upon the
occurrence of certain events, including a sale or transfer of a substantial part
of the Company's assets or a majority of its stockholdings (other than in
connection with a public offering), an acquisition by any party (other than
existing stockholders or their affiliates as of the date of the Servier
Agreements) of a 20% beneficial interest in the Company, or if the Company
manifests an intent to market a substantially similar pharmaceutical product.

     An affiliate of Servier supplied the Company with all of the Company's bulk
chemical requirements for dexfenfluramine for incorporation into the finished
dosage formulation. Interneuron agreed to indemnify Servier under certain
circumstances.

     Boehringer Ingelheim Agreement: In November 1995, the Company entered into
an exclusive manufacturing agreement with Boehringer Ingleheim Pharmaceuticals,
Inc. ("Boehringer") under which Boehringer supplied, and the Company purchased
all of its requirements for Redux capsules from Boehringer. The contract, which
expires December 31, 1998, contains certain minimum purchase and insurance
commitments by the Company and requires conformance by Boehringer to the FDA's
GMP regulations. The agreement provides for the Company to be able to qualify a
second source manufacturer under certain conditions. Interneuron agreed to
indemnify Boehringer under certain circumstances.

CerAxon

     In January 1993, the Company entered into a license and supply agreement
with Ferrer (the "Ferrer Agreement") granting the Company the exclusive right to
make, use and sell any products or processes developed under patent rights
relating to certain uses of CerAxon in exchange for an up-front license fee to
be credited against royalties based on sales. The Company's license includes
patent and know-how rights in the U.S. and know-how rights in Canada, and is for
a period coextensive with Ferrer's license from MIT. The underlying U.S. patent
expires in 2003. See "Patents and Proprietary Rights". The Ferrer Agreement also
provides that Ferrer shall, subject to certain limitations, be the exclusive
supplier at a fixed price of raw materials required for the manufacture of any
product developed under such patent rights. The agreement provides that Ferrer
may terminate the agreement under certain circumstances, including in the event
more than 50% of the ownership of Interneuron is transferred to a non-affiliated
third party or in the event FDA approval of citicoline is not obtained by
January 1999, which date shall be extended if the Company provides information
to Ferrer which tends to establish that the Company has carried out


                                       31

<PAGE>

the steps for obtaining such approval and if such approval has not been obtained
for reasons beyond the Company's control.

Pagoclone

      In February 1994, the Company licensed from RPR exclusive worldwide rights
to pagoclone, a patented compound, for use as an anti-anxiety drug, together
with related know-how, in exchange for license fees, milestone payments and
royalties based on sales.

Lidodex

     In December 1996, the Company entered into an agreement with Algos for the
development and commercialization of a combination pharmacological product known
as LidodexNS, for the treatment of acute migraine headache. The agreement
establishes a multi-stage development collaboration between Algos and
Interneuron and licenses to Interneuron rights, co-exclusive with Algos, to
manufacture and market the combined agent. This collaboration will include
certain pre-clinical studies, clinical trials and regulatory review activities
overseen by a joint steering committee. The companies will also share in the
marketing and profits of LidodexNS.

MIT Licenses

     In March 1994, the Company entered into a license agreement with MIT
granting the Company an exclusive worldwide license to a number of patent rights
and related technology, including a patent covering the use of a low-dose
formulation of melatonin for inducing sleep, in exchange for an initial license
fee and royalties based on sales.

     The Company also licensed from MIT in February 1992, a number of other
patent rights with respect to which Dr. Richard Wurtman was the inventor or
co-inventor in exchange for a license fee and royalties based on sales (the "MIT
License"). The Company's license is exclusive for the longer of the first 12
years following commercialization of an individual licensed product or 2007. The
patents underlying the MIT License expire at various times commencing in 1997.

     The MIT License includes a patent covering the use of a choline source to
reduce fatigue caused by intense exercise. This license is subject to, and
limited by, a license previously granted by MIT to another company, which
licensed two U.S. patents relating to the use of lecithin in capsule, granular
or liquid form (but not in food form or as part of a prescription drug) for
raising blood choline levels. As the Company's sports drinks, under development
by InterNutria, are in a food form (e.g., a drink), the Company does not believe
this license will materially restrict its ability to market this proposed
product. Although the Company believes this product will be considered a food or
a dietary supplement, there can be no assurance that the FDA will not regulate
it as a drug, thereby requiring the filing and approval of an NDA.

Lilly License



                                       32

<PAGE>

     In June 1997, the Company entered into an agreement with Eli Lilly and
Company and Eli Lilly S.A. ("Lilly") relating to the sublicense by the Company
to Lilly of a U.S. patent and worldwide patent application rights covering the
use of fluoxetine to treat disturbances of appetite and mood associated with
premenstrual syndrome. Prozac (fluoxetine hydrochloride), Lilly's
antidepressant, is not currently approved to treat this indication. The Company
received an up-front license fee of $1,000,000, and is entitled to additional
payments based upon the achievement of development and regulatory milestones and
royalties based upon net sales.

     The patent rights to the use of fluoxetine in treating premenstrual
syndrome are licensed by the Company from MIT and are based upon discoveries
about the relationship between brain serotonin deficiency and unwanted weight
gain and mood symptoms. The use of fluoxetine to treat PMS was discovered by
Judith Wurtman, Ph.D., and Richard J. Wurtman, M.D., scientific founder of
Interneuron, both of MIT.


Intercardia Agreements

     Astra Merck Agreement: In December 1995, Intercardia entered into the Astra
Merck Collaboration, a development and marketing collaboration and license
agreement with Astra Merck which provides for the development, commercialization
and marketing of a twice-daily formulation of bucindolol for the treatment of
congestive heart failure in the U.S. Astra Merck made a $5,000,000 payment to
Intercardia and agreed to fund development costs, including Intercardia's
obligations relating to the BEST study and to pay royalties to BMS. Astra Merck
agreed to market bucindolol in the U.S., with Intercardia retaining certain
co-promotion rights. Astra Merck may terminate the Astra Merck Collaboration at
any time in order to enter into a contract relating to, or to launch, a
competing product if it first makes a payment to Intercardia. If a termination
occurs more than five years after FDA approval of an NDA for bucindolol, no
payment would be required.

     The agreement calls for Intercardia to receive additional payments based
upon milestones related to FDA approval and the achievement of specified levels
of sales. Astra Merck agreed to pay the Company $5,000,000 within 10 days of the
grant by the FDA of marketing approval for a twice-daily formulation of
bucindolol, unless such an approval has previously been granted for another
beta-blocker based upon a reduction in heart failure mortality claims.
Intercardia is entitled to royalties of 15% of the first $113,000,000 of annual
net sales and 30% of annual net sales above $113,000,000, adjusted for
inflation. Intercardia and CPEC paid Astra Merck an aggregate of $10,000,000 in
December 1997 and agreed to reimburse one-third of the launch costs through the
first 12 months of commercial sales, up to $11,000,000. In the event Intercardia
does not make these payments, the royalty rate declines to 7% of net sales.

     BASF Pharma/Knoll, AG Agreement: In December 1996, Intercardia executed an
agreement with Knoll (the "Knoll Collaboration") to provide for the development,
manufacture and marketing of bucindolol for the treatment of CHF in all


                                       33

<PAGE>

countries with the exception of the U.S. and Japan. The Knoll Collaboration
relates to both the twice-daily bucindolol formulation and the once-daily
bucindolol formulation currently under development. Under the terms of the Knoll
Collaboration, Knoll made $3,480,000 in payments in fiscal 1997 to CPEC which
were recognized as contract and license fee revenue . Knoll agreed to make
future payments to CPEC upon the achievement of product approval and sales
milestones.

     Intercardia and Knoll agreed to share the development and marketing costs
of bucindolol in the Territory. In general, Knoll agreed to pay approximately
60% of the development and marketing costs prior to product launch, and
Intercardia agreed to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. CPEC will be entitled to a royalty equal to 40% of
net profits, as defined in the Knoll Collaboration, and would be responsible
for, and pay to Knoll, 40% of any net loss, as defined.

     Renaissance Cell Technologies Agreement: In September 1997, Intercardia
acquired approximately 80 percent of Renaissance for $500,000. Renaissance is an
early stage company conducting research in the area of hepatic stem cells.
Renaissance has entered into an agreement with the University of North Carolina
at Chapel Hill to sponsor research on hepatic stem cells in exchange for an
option to an exclusive license for products resulting from the research.
Renaissance has agreed to pay the university an amount not to exceed $450,000
per year for a minimum of two years.

     Bristol-Myers Squibb Agreement: Through CPEC, Intercardia has an exclusive
worldwide license to bucindolol from BMS for pharmaceutical therapy for
congestive heart failure and left ventricular function. The license requires
Intercardia to conduct all appropriate and necessary clinical trials and to take
all actions that are reasonably necessary for the preparation and filing of an
NDA and a comparable application in at least one Western European country.
Intercardia is obligated to pay royalties on net product sales. Unless earlier
terminated, the bucindolol license continues, with respect to each country,
until the later of patent expiration, or 15 years after first commercial sale of
bucindolol (subject to two five-year renewals at Intercardia's option).

     Duke License: In July 1995, Aeolus, Intercardia's 66% owned subsidiary,
obtained from Duke University ("Duke") an exclusive worldwide license (the "Duke
License") to products using catalytic antioxidant small molecule technology and
compounds. The Duke License also provides the Company a 180-day option and
negotiation period to license certain future discoveries in the field of
antioxidant research.

     The Duke License requires Aeolus to use its best efforts to diligently
pursue development of products using the licensed technology and compounds and
to have the licensed technology cleared for marketing in the U.S. by the FDA and
other countries. Duke owns 7.3% of the outstanding shares of Aeolus capital
stock, which was issued in connection with the Duke License. Aeolus will pay
royalties to Duke on net product sales and milestone payments upon the
occurrence of certain events.



                                       34

<PAGE>

Transcell Agreements

     Merck Agreement: In July 1997, Transcell, Interneuron and Merck entered
into a Research Collaboration and Licensing Agreement effective as of June 30,
1997, relating to the discovery and commercialization of certain novel
antibacterial agents. Merck has an option to extend the field of the
collaboration and license to include all antibacterial pharmaceutical products.
The agreement provides for Merck to make initial license and option payments
totaling $2,500,000 (which were received in July 1997) plus research support
during the first two years of the agreement. Additionally, Transcell is entitled
to payments based upon achievement of defined late-stage clinical development
and regulatory milestones and royalties based upon net sales of products
resulting from the collaboration. Fifty percent of certain milestone payments
are creditable against royalties. Certain of the rights licensed to Merck are
based on exclusive licenses or rights held by Transcell and Interneuron from
Princeton University, which will be entitled to varying percentages of certain
payments and royalties received from Merck.

     Princeton Licenses: In January 1992 and October 1993, Transcell entered
into license agreements with Princeton pursuant to which Transcell was granted
exclusive worldwide licenses to specified patent applications and any patents
that issue therefrom, including any derivative patent applications or patents
that issue, relating to certain technology funded by Transcell and any licensed
products, in exchange for an up-front license fee and royalties based on sales.
The license agreements provide for Transcell to use its best efforts to
commercialize the licensed products or processes, including satisfying
milestones. In addition, Interneuron has an agreement to license certain
technologies and related patent rights from Princeton, in exchange for certain
milestone payments and royalties based on sales, a portion of which was
sublicensed to Merck.

Progenitor Agreements

     SBCL Agreement: In September 1997, Progenitor entered into an agreement
with SBCL granting SBCL an exclusive right and license to develop and perform a
genetic test for a common inherited disease, hereditary hemochromatosis.
Hereditary hemochromatosis is an iron overload disease that allows various
organs in the body to absorb and accumulate too much iron. The agreement gives
SBCL certain exclusive rights in the U.S. and several international markets to
develop and perform clinical laboratory testing under Progenitor's patent
applications covering the gene for hereditary hemochromatosis (HFE) and its
specific mutations. This gene was discovered in 1996 by a team of researchers at
Mercator. Under terms of the agreement, Progenitor will receive annual fees as
well as payments on a per test basis from each test from which SBCL derives
revenue.

     Amgen Agreement: In December 1996, Progenitor entered into a license
agreement with Amgen granting Amgen certain exclusive rights for the development
and commercialization of products using Progenitor's leptin receptor technology.
Amgen paid Progenitor a $500,000 license fee in January 1997. In the event Amgen
develops products relating to the licensed technology, Progenitor may also
receive from Amgen certain development and regulatory milestone payments and
potential royalties on product sales. Amgen purchased $5,500,000 of Progenitor
common stock in Progenitor's initial public offering, at a price of $5.375 per
share in connection with a stock purchase agreement entered into at the same
time as the license agreement.


                                       35

<PAGE>

     Novo Nordisk/ZymoGenetics Agreement: In May 1995, Progenitor and Novo
Nordisk, through its subsidiary ZymoGenetics, entered into a research,
development and commercialization agreement under which Novo Nordisk received an
exclusive, worldwide license to any and all rights of Progenitor related to the
BFU-e red blood cell growth factor activity identified by Progenitor, for use in
any and all human therapeutic and small molecule drug design uses. An amended
and restated agreement was executed between the parties in January 1997. Under
the agreement, the development effort is divided into two stages. During the
first stage, Novo Nordisk and Progenitor are attempting to purify, clone and
sequence a BFU-e red blood cell growth factor and other growth factors with
similar hematopoietic functions. If this stage is successfully completed, Novo
Nordisk will have the right to decide whether to proceed to the second stage, in
which Progenitor may conduct research to establish the biological function of
the growth factor. During the second stage, if commenced, Novo Nordisk has the
option to engage Progenitor for additional research, which may entitle
Progenitor to receive up to $4.0 million in research fees from Novo Nordisk. If
Novo Nordisk decides to develop any licensed products, it will be obligated to
pay Progenitor a one-time license fee of $2.0 million and up to an additional
$22.0 million for each product if certain clinical testing, regulatory and
marketing approval milestones are met. In addition, Progenitor has the right to
receive royalties for sales of any resulting products. Novo Nordisk has the
right to manufacture and market any such products on an exclusive worldwide
basis.

     Chiron Agreement: In March 1995, Progenitor entered into an agreement with
Chiron for the development and commercialization of Progenitor's T7T7 gene
delivery technology for selected applications in cancer, infectious diseases and
cardiovascular disorders. All rights to product applications of the technology
that are not specifically included in the agreement are retained by Progenitor.
Under the agreement, Progenitor received payments of $3,000,000, of which
$750,000 was then paid by Progenitor to Chiron to reimburse Chiron for certain
start-up manufacturing costs. Progenitor may receive additional payments based
upon the achievement of defined, mostly late-stage clinical development and
regulatory milestones. Progenitor also would receive royalties from commercial
sales of any products resulting from the collaboration.

     Other Progenitor Agreements

     Progenitor entered into license agreements with Ohio University in January
1992 and April 1993, as amended in October 1993. The license agreements grant
Progenitor the exclusive worldwide rights to yolk sac stem cells, gene delivery
technologies, and related technologies in exchange for royalties based on net
sales and an equity investment in Progenitor. Two U.S. patents and several
foreign patents have been issued, and two patent applications are pending in the
U.S. and certain foreign countries.

     In July 1995, Progenitor obtained from Vanderbilt University exclusive
worldwide rights to Vanderbilt's rights under two jointly owned patent
applications utilizing technology relating to a gene, del- 1, that may play a
role in the development and growth of blood vessels. The gene was co-discovered
by Progenitor and Vanderbilt. The license was granted in exchange for royalties
based on sales. Vanderbilt may terminate the license after three years if
Progenitor has not made adequate efforts to commercialize products based on the
gene. In July 1997, Progenitor granted Interneuron an option and right of first
refusal to acquire an exclusive worldwide license to manufacture, use and sell
certain aspects of Del-1,


                                       36

<PAGE>

the protein encoded by the del-1 gene, on the terms to be negotiated, in
exchange for waivers of certain rights by Interneuron to additional shares of
Progenitor common stock.

     In September 1996, Progenitor entered into sponsored research agreements
with the National Jewish Center for Immunology and Respiratory Medicine and with
Vanderbilt University. Under the separate agreements, Progenitor will fund
genomic research to characterize the genes that are active early in the
formation of blood and immune cells and in the development of blood vessels.
Each agreement provides Progenitor first rights to license discoveries and
technologies arising from the research programs.

PATENTS AND PROPRIETARY RIGHTS

     Redux

     Under the Servier Agreements, the Company has an exclusive license to sell
dexfenfluramine in the U.S. under a patent covering the use of dexfenfluramine
to treat abnormal carbohydrate craving, which has been sublicensed by the
Company to AHP. The compound patent on dexfenfluramine, which was discovered by
Servier, has expired. Use of dexfenfluramine for the treatment of abnormal
carbohydrate craving was patented by Drs. Richard Wurtman and Judith Wurtman,
consultants to the Company and directors of Interneuron and InterNutria,
respectively. This use patent was assigned to MIT and licensed by MIT to
Servier, and pursuant to the Servier Agreements was licensed to the Company. The
Drs. Wurtman have advised the Company that, in accordance with MIT policy, they
are entitled to 50% of the royalties received by MIT in connection with MIT's
licensing of dexfenfluramine to Servier.

     CerAxon

     The compound CerAxon is not covered by a composition of matter patent. The
licensed U.S. patent covering the administration of CerAxon to treat patients
afflicted with conditions associated with the inadequate release of brain
acetylcholine expires in 2003. As described in the licensed patent, the
inadequate release of acetylcholine may be associated with several disorders,
including the behavioral and neurological syndromes seen after brain traumas and
peripheral neuro-muscular disorders and post-stroke rehabilitation. Although the
claim of the licensed patent is broadly directed to the treatment of inadequate
release of brain acetylcholine, there can be no assurance this patent will
afford protection against competitors of CerAxon to treat ischemic stroke. In
addition to any proprietary rights provided by this patent, the Company expects
to rely on certain marketing exclusivity regulations of the FDA. In December
1997, the Company received a notice of allowance of claims pending in a patent
application relating to the use of citicoline as a neuroprotectant agent.
Additional domestic and international patent applications have been filed by the
Company.

     Pagoclone

     Interneuron licensed from RPR on a worldwide basis patents and patent
applications covering a composition of matter, processes, and metabolites of
pagoclone. A U.S. composition of matter patent was issued in October 1990 and
related U.S. patents were issued in February and March 1996.



                                       37

<PAGE>

     Low-dose Melatonin

     Interneuron licensed from MIT a patent issued in September 1995 that covers
the use of low-doses of melatonin for the induction of sleep, in exchange for
royalties based on sales.

     Bextra

     CPEC has licensed from BMS a compound patent on bucindolol which expired in
November 1997. Intercardia intends to pursue up to five years of market
exclusivity under the Waxman-Hatch Act, although there can be no assurance such
exclusivity will be obtained, and to develop a once-daily formulation of the
drug. See "Government Regulation."

     Transcell

     Transcell has exclusive rights under two U.S. patents and U.S. patent
applications and their foreign counterparts relating to oligosaccharide
synthesis/combinatorial chemistry. Transcell also has exclusive licenses under
five U.S. patents assigned to Princeton University relating to Transcell's drug
transport technology.


     Progenitor

     Progenitor has received one issued patent and two notices of allowance and
has filed several additional U.S. patent applications relating to leptin
receptors (including various isoforms of the leptin receptors). The Company
believes that there may be significant litigation in the industry regarding
patent and other intellectual property rights relating to leptin and leptin
receptors. The Company is aware that Millennium Pharmaceuticals, Inc.
("Millennium") has filed a patent application relating to a receptor for leptin
and its use in obesity applications, and has licensed to Hoffman-LaRoche, Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor. There can be no assurance that Millennium's patent
application, or any additional patent applications filed by Millennium or
others, will not result in issued patents covering a leptin receptor, the leptin
protein or other ligands, or any of their respective uses. There can be no
assurance that the invention by Millennium will be accorded an invention date
later than Progenitor's invention date or that any patent issued to Progenitor
would be broad enough to cover leptin receptors of Millennium or others.
Progenitor's failure to obtain a patent that covers the leptin receptors of
Millenium or others, or the issuance of a patent to a third party covering a
leptin receptor, the leptin protein or other ligands, or any of their respective
uses, could have a material adverse effect on Progenitor. Any legal action
against Progenitor claiming damages and seeking to enjoin commercial activities
relating to the affected products and processes could, in addition to subjecting
Progenitor to potential liability for damages, require Progenitor or any
strategic partner to obtain a license in order to continue to manufacture or
market the affected products and processes. There can be no assurance that
Progenitor would prevail in any such action or that any license required under
any such patent would be made available on commercially acceptable terms, if at
all.



                                       38

<PAGE>

     Progenitor has licensed from Ohio University one U.S. patent relating to
stem cell technology and one U.S. patent relating to gene delivery technology
(T7T7), along with certain corresponding foreign patents and applications.

     Progenitor has pending U.S. and foreign patent applications relating to
certain diagnostic markers for Hereditary Hemochromatosis and has received two
notices of allowance for two such applications. Progenitor also has pending
patent applications relating to mutations in its HH gene for which it has
received notice of allowance and pending patent applications relating to the
gene itself. In addition, Progenitor has pending a patent application on the
transcript map of all genes in the region of the HH gene.

     The Company is aware of a patent issued to Barry E. Rothenberg, related to
a method to identify hemochromatosis. The Company believes that the patent may
have been licensed to a private biotechnology company. The Rothenberg patent
does not include claims related to gene structure or the specific mutations that
give rise to hemochromatosis. However, there can be no assurance that Progenitor
and its licensee, SBCL, would be able to market an HH test without obtaining a
license to the Rothenberg patent. If such a license is required, there can be no
assurance that it may be obtained on commercially reasonable terms.

     There can be no assurance that patent applications filed by the Company or
others, in which the Company has an interest as assignee, licensee or
prospective licensee, will result in patents being issued or that, if issued,
any of such patents will afford protection against competitors with similar
technology or products, or could not be designed around or challenged. If the
Company is unable to obtain strong proprietary rights protection of its products
after obtaining regulatory clearance, competitors may be able to market
competing products by obtaining regulatory clearance, through showing
equivalency to the Company's product, without being required to conduct the
lengthy clinical tests required of the Company. The patent situation in the
field of biotechnology generally is highly uncertain and involves complex legal,
scientific and factual questions. To date, there has emerged no consistent
policy regarding the breadth of claims allowed in biotechnology patents.

     Products being developed by the Company may conflict with patents which
have been or may be granted to competitors, universities or others. Third
parties could bring legal actions against the Company claiming patent
infringement and seeking damages or to enjoin clinical testing, manufacturing
and marketing of the affected product or process. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license, which may not be available, in order to
continue to manufacture or market the affected product or use the affected
process. The Company also relies upon unpatented proprietary technology and may
determine in some cases that its interest would be better served by reliance on
trade secrets or confidentiality agreements rather than patents. No assurance
can be made that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to such
proprietary technology or disclose such technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. The
Company may also conduct research on other pharmaceutical compounds or
technologies, the rights to which may be held by, or be subject to, patent
rights of third parties and accordingly, if products based on such technologies
are commercialized, they may infringe such patents or other rights.


                                       39

<PAGE>

GOVERNMENT REGULATION

     Therapeutics

     Most of the Company's products will require regulatory clearance by the FDA
prior to commercialization. The nature and extent of regulation differs with
respect to different products. In order to test, produce and market certain
therapeutic products in the United States, mandatory procedures and safety
standards, approval processes, and manufacturing and marketing practices
established by the FDA must be satisfied.

     An IND application is required before human clinical use in the United
States of a new drug compound or biological product can commence. The IND
application includes results of pre-clinical (animal) studies evaluating the
safety and efficacy of the drug and a detailed description of the clinical
investigations to be undertaken.

     Clinical trials are normally done in three phases. Phase 1 trials are
concerned primarily with the safety and preliminary effectiveness of the
product. Phase 2 trials are designed primarily to demonstrate effectiveness in
treating the disease or condition for which the product is limited, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness needed to clarify the
product's benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug,
among other things. The FDA receives reports on the progress of each phase of
clinical testing and may require the modification, suspension or termination of
clinical trials if an unwarranted risk is presented to patients. When data is
required from long-term use of a drug following its approval and initial
marketing, the FDA can require Phase 4, or post-marketing, studies to be
conducted.

     With certain exceptions, once successful clinical testing is completed, the
sponsor can submit an NDA for approval of a drug or Product License Application
("PLA") for approval of a biologic. The FDA's review of an NDA or PLA is
lengthy. In addition, an establishment license application is generally required
to be filed with and approved by the FDA for the manufacturing facility for a
biologic.

     Patent Term Extension and Market Exclusivity

     Under the Drug Price Competition and Patent Term Restoration Act of 1984
(commonly referred to as the "Waxman-Hatch Act"), a patent which claims a
product, use or method of manufacture covering drugs and certain other products
may be extended for up to five years to compensate the patent holder for a
portion of the time required for research and FDA review of the product.
Although Interneuron has applied for such protection for the use patent covering
dexfenfluramine, the Company cannot predict whether it will receive such an
extension. The Waxman-Hatch Act also establishes periods of market exclusivity,
which are various periods of time following approval of a drug during which the
FDA may not approve, or in certain cases even accept, applications for certain
similar or identical drugs from other sponsors unless those sponsors provide
their own safety and effectiveness data. Under present regulatory
interpretations, the longest period of market exclusivity (five years) may not
be available to isomers, such


                                       40

<PAGE>

as dexfenfluramine, of a previously approved drug (fenfluramine) whose active
ingredient is a mixture of related isomers.

     The Company believes that CerAxon and bucindolol may be entitled to patent
extension and to five years of market exclusivity, respectively, under the
Waxman-Hatch Act. However, there can be no assurance that the Company will be
able to take advantage of either the patent term extension or marketing
exclusivity provisions or that other parties will not challenge the Company's
rights to such exclusivity.

     Foods and Dietary Supplements

     Foods with health-related claims are subject to regulation by the FDA as
conventional foods, medical foods, dietary supplements or drugs, and a product's
classification will depend, in part, on its intended use as reflected in the
claims for the product. InterNutria's products are expected to be regulated as
dietary supplements pursuant to the Dietary Supplement Health Education Act of
1994 ("DSHEA") for the dietary management of physiological processes.

     If represented for use in the cure, mitigation, treatment or prevention of
disease, a product will be regulated as a drug. If no such claims are made, the
product may be regulated as a conventional food or as a dietary supplement. No
explicit or implicit claim that "characterizes the relationship" of a nutrient
to a "disease or health-related condition" is permitted in food labeling unless
the FDA has authorized that claim by regulation or unless the claim has been
endorsed by a scientific body of the U.S. Government with official
responsibility for public health protection and the FDA receives prior notice of
the use of such claim.

     Dietary supplements may bear claims describing the role of nutrient or
dietary ingredient intended to affect the structure or function of the body,
provided certain requirements (such as substantiation for the claims) are met.
These claims need not be authorized by the FDA in a regulation.

      Although the Company believes that Melzone, PMS Escape and ProHydrator,
ProEnhancer and Race Day are considered dietary supplements, there can be no
assurance that the FDA will not attempt to regulate them as drugs, thereby
requiring the filing of NDAs and review and approval by the FDA prior to
marketing. In addition, classification of these products as dietary supplements
limits the types of claims that can be made in marketing.

     The FDA also regulates the substances that may be included in food
products. A substance intended for use as a food or to be added to a food may be
marketed only if it is generally recognized among qualified experts as safe for
its intended use or if it has received FDA approval for such use in the form of
a food additive regulation. If the Company develops a food which is, or which
contains, a substance that is not generally recognized as safe or approved by
the FDA in a food additive regulation for its intended use, then such approval
must be obtained prior to the marketing of the product. The Company will be
required to present studies showing, among other things, that the substance is
safe for its intended use. Dietary ingredients used in dietary supplements need
not be generally recognized as safe, but they may not present a significant or
unreasonable risk of illness or injury.



                                       41

<PAGE>

     Progenitor

     The precise regulatory standards to which Progenitor's proposed therapeutic
products eventually will be held are uncertain due to the uniqueness of the
therapies under development. The Company assumes that Progenitor's therapeutic
products will be subjected to clinical testing similar to that of a drug, in
addition to other FDA and international approval processes. The Company expects
that the majority, if not all, of the therapeutic products developed by
Progenitor will be classified by the FDA as biological products.

     Certain of Progenitor's discoveries will be marketed as reference lab
services, for example, the hemochromatosis test. While the FDA does not regulate
such tests, clinical reference laboratories are subject to the standards
required by other laws and regulations, CLIA, the Clinical Laboratory
Improvement Act.

     It is possible that certain of the products being developed by Progenitor
will be regulated by the FDA as drugs or as medical devices. The FDA approval
process for medical devices or diagnostics differs from that for drugs or
biologics but may also be expensive and time-consuming. Progenitor's activities
may also be subject to guidelines established by the NIH relating to the
transfer of recombinant DNA into humans. All such research, including clinical
trials, must be approved by the NIH Recombinant DNA Advisory Committee.

     Gene Therapy Regulation

     The NIH has established the NIH Recombinant DNA Advisory Committee (the
"RAC") to advise the NIH concerning NIH-supported research involving the use of
recombinant DNA. After the protocol has been approved by the local Institutional
Review Board and Institutional BioSafety Committee of the institution where the
trial is to be conducted, which address issues such as the provision of informed
consent by human research subjects and the risks to human subjects in
relationship to anticipated benefits of the research, the protocol must be
submitted to NIH's Office of Recombinant DNA Activities ("ORDA") for review. A
determination is made by ORDA whether a protocol is novel and therefore
deserving of full RAC discussion. During a full RAC discussion, all meetings of
the RAC are open to the press and public and therefore could subject Progenitor
to unfavorable public sentiment regarding human gene therapy products. All
NIH-funded protocols involving recombinant DNA must comply with NIH guidelines,
but Progenitor intends to comply voluntarily with RAC and NIH guidelines even
when, under present policy, it may not be subject to them.

     The FDA has jurisdiction over drug and biological products intended for use
in patients. FDA must review and authorize human trials involving gene therapy,
whether or not the research is federally funded and regardless of the RAC's
recommendations. The FDA requires the submission of an IND application before
human trials with new biological drugs can be conducted. Because gene therapy is
a novel therapeutic approach, the approval process for clinical trials involving
gene therapy is not yet clearly defined. There can be no assurance that
Progenitor will be able to comply with future requirements or that its products
will be approvable.



                                       42

<PAGE>

     New human gene therapy products are expected to be subject to extensive
regulation by the FDA and comparable agencies in other countries. The precise
regulatory requirements that will have to be complied with are uncertain at this
time due to the novelty of the human gene therapies under development.
Currently, each protocol is reviewed by the FDA on a case by case basis. The FDA
has published a "Points to Consider" guidance document with respect to the
development of gene therapy protocols. The Company believes that certain
products developed by Progenitor will be regulated as biological products. In
addition, each vector containing a particular gene is expected to be regulated
as a separate biological product or new drug, depending upon its intended use
and FDA policy. New drugs are subject to regulation under the Federal Food, Drug
and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. One or both statutes and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, advertising and other promotional practices involving
biologics or new drugs. FDA approval or other clearances must be obtained before
clinical testing, and before manufacturing and marketing, of new biologics or
other new drug products. At the FDA, the Center for Biologics Evaluation and
Research ("CBER") is responsible for the regulation of new biological drugs.
CBER has a Division of Cell and Gene Therapy, which is the primary group within
the FDA to oversee gene therapy products.

     Other

     The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act,
the Federal Trade Commission Act, and other federal and state statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of drug,
biological, medical device and food products. Noncompliance with applicable
requirements can result, among other things, in fines, recall or seizure of
products, refusal to permit products to be imported into the U.S., refusal of
the government to approve product approval applications or to allow Interneuron
to enter into government supply contracts, withdrawal of previously approved
applications and criminal prosecution. The FDA may also assess civil penalties
for violations of the Federal Food, Drug, and Cosmetic Act involving medical
devices. The Federal Trade Commission may assess civil penalties for violations
of the requirement to rely upon a "reasonable basis" for advertising claims for
non-prescription and food products.

EMPLOYEES

     As of September 30, 1997, Interneuron and its Subsidiaries had 171
full-time employees, including 68 at Interneuron, 18 at Intercardia, 32 at
Transcell, six at InterNutria and 47 at Progenitor. None of the Company's
employees is represented by a labor union and Interneuron believes its employee
relations are satisfactory. The Company is highly dependent upon certain key
personnel and believes its future success will depend in large part on its
ability to retain such individuals and attract other highly skilled management,
marketing and scientific personnel. See "Risk Factors - Risks Relating to
Withdrawal of Redux and Legal Proceedings."

Item 2.  Properties


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<PAGE>

     The Company leases an aggregate of approximately 43,300 square feet of
office space in Lexington, MA. The lease expires in April 2002 and provides for
annual rent of approximately $696,000. The Subsidiaries (excluding
Progenitor) are parties to office leases providing for aggregate annual rental
of approximately $1,750,000. The Company has guaranteed certain Subsidiaries'
obligations under lease arrangements.


Item 3.  Legal Proceedings

     The Company has been named, together with other pharmaceutical companies,
as a defendant in approximately 200 legal actions, many of which purport to be
class actions, in federal and state courts relating to the use of Redux. The
actions generally have been brought by individuals in their own right or on
behalf of putative classes of persons who claim to have suffered injury or who
claim that they may suffer injury in the future due to use of one or more weight
loss drugs including Pondimin (fenfluramine), phentermine and Redux. Plaintiff's
allegations of liability are based on various theories of recovery, including,
but not limited to, product liability, strict liability, negligence, various
breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These
lawsuits typically allege that the short or long-term use of Pondimin and/or
Redux, independently or in combination (including the combination of Pondimin
and phentermine popularly known as "fen/phen"), causes, among other things,
primary pulmonary hypertension, valvular heart disease and/or neurological
dysfunction. In addition, some lawsuits allege emotional distress caused by the
purported increased risk of injury in the future. Plaintiffs typically seek
relief in the form of monetary damages (including economic losses, medical care
and monitoring expenses, loss of earnings and earnings capacity, other
compensatory damages and punitive damages), generally in unspecified amounts, on
behalf of the individual or the class. In addition, some actions seeking class
certification ask for certain types of purportedly equitable relief, including,
but not limited to, declaratory judgments and the establishment of a research
program or medical surveillance fund. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings.

     The Company and certain directors and/or officers of the Company have also
been named as defendants in several lawsuits filed by alleged purchasers of the
Company's Common Stock, purporting to be class actions, claiming among other
things that the Company publicly disseminated materially false and misleading
statements concerning the prospects and safety of Redux, resulting in the
artificial inflation of the Company's Common Stock price during various periods,
the earliest commencing December 16, 1996 through September 17, 1997, in
violation of the federal securities laws.

     Under certain circumstances, the Company is required to indemnify Servier,
Boehringer Ingelheim Pharmaceuticals, Inc. (the contract manufacturer of Redux
capsules) and AHP, and the Company is entitled to indemnification by AHP,
against certain claims, damages or liabilities incurred in connection


                                       44

<PAGE>

with Redux. The cross indemnification between the Company and AHP generally
relates to the activities and responsibilities of each company. Although the
Company maintains certain product liability and director and officer liability
insurance and intends to defend these and similar actions vigorously, the
Company may be required to devote significant management time and resources to
these actions and, in the event of successful uninsured or insufficiently
insured claims, or in the event a successful indemnification claim was made
against the Company, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, the
uncertainties associated with these legal actions have had, and may continue to
have, an adverse effect on the market price of the Company's common stock, and
may impair the Company's ability to obtain additional financing to satisfy cash
requirements, to retain and attract qualified personnel, to commercialize
products on a timely and adequate basis and to acquire or obtain rights to
additional products, any or all of which may materially adversely affect the
Company's business. See "Risk Factors".

Item 4.  Submission of Matters to a Vote of Security Holders

     Not applicable

EXECUTIVE OFFICERS

         The following table sets forth the names and positions of the executive
officers of the Company:

<TABLE>
<CAPTION>
         Name                            Age      Position
         ----                            ---      --------
<S>                                      <C>      <C>

Lindsay A. Rosenwald, M.D.               42       Chairman of the Board of Directors

Glenn L. Cooper, M.D.                    44       President, Chief Executive
                                                  Officer and Director

Mark S. Butler                           51       Executive Vice President, Chief
                                                  Administrative Officer and General
                                                  Counsel

Thomas F. Farb                           41       Executive Vice President, Chief
                                                  Financial Officer and Treasurer

Bobby W. Sandage, Jr., Ph.D.             44       Executive Vice President, Research
                                                  and Development and Chief Scientific
                                                  Officer
</TABLE>


     Lindsay A. Rosenwald, M.D. was a co-founder and since February 1989 has
been Chairman of the Board of Directors of the Company. Dr. Rosenwald has been
the Chairman and President of The Castle Group Ltd., a biotechnology and
biopharmaceutical venture capital firm, since October 1991, the Chairman and
President of Paramount Capital Investments, LLC, a biotechnology, biomedical and


                                       45

<PAGE>

biopharmaceutical merchant banking firm, since 1995, the Chairman and President
of Paramount Capital, Inc., an investment banking firm, since February 1992, and
the founder, Chairman and President of Paramount Capital Asset Management, Inc.
a money management firm specializing in the life sciences industry since June
1994. Dr. Rosenwald received his M.D. from Temple University School of Medicine
and his B.S. in Finance from Pennsylvania State University. Dr. Rosenwald is
also a director of the following publicly-traded pharmaceutical or biotechnology
companies: Atlantic Pharmaceuticals, Inc., Avigen, Inc., BioCryst
Pharmaceuticals, Inc., Neose Technologies, Inc., Sparta Pharmaceuticals, Inc.,
Titan Pharmaceuticals, Inc., VIMRx Pharmaceuticals, Inc. and Xenometrix, Inc.
and is a director of a number of privately held companies in biotechnology or
pharmaceutical fields.

         Glenn L. Cooper, M.D. has been President, Chief Executive Officer and a
director of the Company since May 1993. Dr. Cooper was also Progenitor's
President and Chief Executive Officer from September 1992 to June 1994, is a
director of each of the Subsidiaries and is currently serving as acting
President and Chief Executive Officer of Transcell. Dr. Cooper is a director of
Genta Incorporated ("Genta"), a publicly- traded biotechnology company. Prior to
joining Progenitor, Dr. Cooper was Executive Vice President and Chief Operating
Officer of Sphinx Pharmaceuticals Corporation from August 1990. Dr. Cooper had
been associated with Eli Lilly since 1985, most recently, from June 1987 to July
1990, as Director, Clinical Research, Europe, of Lilly Research Center Limited;
from October 1986 to May 1987 as International Medical Advisor, International
Research Coordination of Lilly Research Laboratories; and from June 1985 to
September 1986 as Medical Advisor, Regulatory Affairs, Chemotherapy Division at
Lilly Research Laboratories. Dr. Cooper received his M.D. from Tufts University
School of Medicine, performed his postdoctoral training in Internal Medicine and
Infectious Diseases at the New England Deaconess Hospital and Massachusetts
General Hospital and received his A.B. from Harvard College.

         Mark S. Butler joined the Company in December 1993 as Senior Vice
President (and in December 1995 was appointed Executive Vice President), Chief
Administrative Officer and General Counsel. Prior to joining the Company, Mr.
Butler was associated with the Warner-Lambert Company since l979, serving as
Vice President, Associate General Counsel since 1990, as Associate General
Counsel from 1987 to 1990, Assistant General Counsel from 1985 to 1987 and in
various other legal positions from 1979 to 1985. From 1975 to 1979, Mr. Butler
was an attorney with the law firm of Shearman & Sterling.

         Thomas F. Farb joined the Company in April 1994 as Senior Vice
President (and in December 1995 was appointed Executive Vice President), Chief
Financial Officer and Treasurer. Prior to joining the Company, from October
1992, Mr. Farb was the Vice President of Finance and Corporate Development of
Cytyc Corporation, a public medical device and diagnostics company. From 1989 to
October 1992, he was Senior Vice President, Chief Financial Officer and a
Director of Airfund Corporation, a commercial aircraft leasing company, and from
October 1983 to April 1989, he held various positions at Symbolics, Inc., a
computer and software manufacturer, including General Manager of Eastern
Operations, Vice President, Finance and Corporate Development and Chief
Financial Officer. Mr. Farb received an A.B. from Harvard College. He is a
director of HNC Software, Inc. and Redwood Trust, Inc., both public companies.

         Bobby W. Sandage, Jr., Ph.D. joined the Company in November 1991 as
Vice President - Medical and Scientific Affairs and was appointed Vice President
- Research and Development in February 1993,


                                       46

<PAGE>

Senior Vice President - Research and Development in February 1994 and Executive
Vice President Research and Development and Chief Scientific Officer in December
1995. From February 1989 to November 1991 he was Associate Director, Project
Management for the Cardiovascular Research and Development division of DuPont
Merck Pharmaceutical Company. From May 1985 to February 1989 he was affiliated
with the Medical Department of DuPont Critical Care, most recently as associate
medical director, medical development. Dr. Sandage is an adjunct professor in
the Department of Pharmacology at the Massachusetts College of Pharmacy. Dr.
Sandage received his Ph.D. in Clinical Pharmacy from Purdue University and his
B.S. in Pharmacy from the University of Arkansas. He is a director of Aeolus, a
subsidiary of Intercardia, and of Genta.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and on representations that no other
reports were required, there were no reports required under Section
16(a)("Section 16(a)") of the Securities Exchange Act of 1934 which were not
timely filed during fiscal 1997, except that: (i) an initial report on Form 3
was filed on February 12, 1997 by Dale Ritter, who became a reporting person
under Section 16(a) on December 28, 1996, and (ii) reports on Form 4 reporting
the exercise of options on February 17, and April 28, 1997 were filed by Harry
Gray, a director of the Company, on April 9, and June 4, 1997, respectively.



                                       47

<PAGE>

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

         Price Range of Securities

         Interneuron's Common Stock trades on the Nasdaq National Market under
the symbol "IPIC". The table below sets forth the high and low sales prices of
Interneuron's Common Stock as reported by the Nasdaq National Market for the
periods indicated. These prices are based on quotations between dealers, do not
reflect retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
                                                              High              Low
                                                              ----              ---
<S>                                                           <C>           <C>
Fiscal Year Ended September 30, 1996:

         October 1 through December 31, 1995                  $31 1/4        $11 5/8

         January 1 through March 31, 1996                      38             22 1/2

         April 1 through June 30, 1996                         44 1/2         29 1/2

         July 1 through September 30, 1996                     35 1/2         19 3/4

Fiscal Year Ended September 30, 1997:

         October 1 through December 31, 1996                  $29 3/4        $18 1/2

         January 1 through March 31, 1997                      32 5/8         15 7/8

         April 1 through June 30, 1997                         21 5/8         12 3/4

         July 1 through September 30, 1997                     22             10 7/8
</TABLE>

         Approximate Number of Equity Security Holders

         The number of record holders of the Company's Common Stock as of
December 22, 1997 was approximately 700. The Company believes that the number of
beneficial owners exceeds 16,000.

         Dividends

         The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends. Any dividends will be subject to the preferential dividend of $0.1253
per


                                       48

<PAGE>

share payable on the outstanding Series B Preferred Stock ($30,000 per annum),
$1.00 per share payable on the outstanding Series C Preferred Stock ($5,000 per
annum) and dividends payable on any other preferred stock issued by the Company.

         Recent Sales of Unregistered Securities

         The Company did not issue any securities during the quarter ended
September 30, 1997 which were not registered under the Securities Act of 1933,
as amended, except as follows:

         In September 1997, the Company and Swiss Bank Corporation, London
Branch ("SBC") amended call option transactions relating to Interneuron's Common
Stock originally entered into in May 1997. As amended, the Company sold to SBC
call options entitling SBC to purchase from the Company at a strike price of
$36.00 per share, an aggregate of 2,000,000 shares of Interneuron Common Stock,
1,000,000 shares on each of December 30 and 31, 1999. In exchange, Interneuron
purchased call options giving Interneuron the right to purchase from SBC up to a
total of 1,240,000 shares of Interneuron Common Stock at a strike price of
$14.50. The call options are exercisable only at their maturities, which are
December 31, 1997, June 9, 1998, September 21, 1998 and January 11, 1999 each
with respect to 310,000 shares, and are subject to caps of $22.50, $29.50,
$32.50 and $34.50, respectively.

         Modification to the original options, which consisted of extensions of
maturity dates and reductions of the caps and strike prices, resulted in a
$500,000 cash payment to the Company. See "Managements Discussion and Analysis
of Financial Condition and Results of Operations".

         In September 1997, the Company issued 10,715 shares of Common Stock to
Lehman Brothers Holding Inc. in consideration of investment banking services.

Item 6.  Selected Financial Data

         The selected financial data presented below summarizes certain
financial data which has been derived from and should be read in conjunction
with the more detailed financial statements of the Company and the notes thereto
which have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report thereon is included elsewhere in this Annual Report on Form 10-K
along with said financial statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".




                                       49

<PAGE>

                         Fiscal Years Ended September 30,
                  (Amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                            1993              1994            1995             1996          1997
                                                            ----              ----            ----             ----          ----
<S>                                                         <C>             <C>            <C>              <C>            <C>
Statement of Operations Data:
Revenues:

     Product revenue                                    $        --       $       --      $       --        $  14,162      $ 56,824
     Contract and license fee revenue                        11,584              101           3,463            8,335        11,039
                                                             ------          -------         -------        ---------        ------
     Total revenues                                          11,584              101           3,463           22,497        67,863
                                                          =========          =======         =======         ========        ======

Cost of product revenue                                          --               --              --           11,617        41,496
Research and development expenses                            20,014           17,737          15,168           17,824        50,865
Selling, general and administrative
     expenses                                                 5,242            8,403           7,733           17,167        24,890
Product withdrawal                                               --               --              --               --         7,528
Purchase of in-process research and
     development                                                 --            1,852              --            8,584         3,044
Net loss from operations                                    (13,672)         (27,891)        (19,438)         (32,695)      (59,960)
Investment income, net                                          938              505             894            4,135         8,825
Equity in loss of unconsolidated subsidiary                      --               --              --               --        (9,028)
Net loss                                                    (12,734)         (27,386)        (17,981)         (27,986)      (55,256)
Net loss per common share                                $     (.50)       $   ( .98)      $    (.59)    $       (.76)   $    (1.35)
Weighted average common
        shares outstanding                                   25,492           27,873          30,604           37,004        41,064

                                                         September 30,
                                                    (Amounts in thousands)
Balance Sheet Data:
                                                            1993              1994            1995             1996          1997
                                                            ----              ----            ----             ----          ----
Working capital                                             $19,444          $ 8,577         $25,755         $155,246     $  82,229
Total assets                                                 23,689           18,278          37,516          186,438       152,930
Long-term portion of notes payable
     and capital lease obligations                               --            1,025             782              542         1,734
Total liabilities                                             2,462            8,501          10,486           22,303        43,962
Accumulated deficit                                         (33,426)         (60,811)        (78,792)        (106,778)     (162,034)
Stockholders' equity                                         21,227            9,777          21,392          144,762        96,009

</TABLE>

                                       50

<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations:

         The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.

General

            Redux

         Product Withdrawal and Legal Proceedings: On September 15, 1997, the
Company announced the withdrawal of the weight loss medication Redux . On
September 12, 1997, the FDA provided the Company and Wyeth-Ayerst and
manufacturers and marketers of phentermine with new, preliminary and summary
information (which has recently been updated and revised by the FDA) concerning
potential abnormal echocardiogram findings in patients using these drugs. These
patients had been treated with Pondimin or Redux for up to 24 months, most often
in combination with phentermine. Redux was launched in June 1996.

         These observations presented by the FDA reflected a preliminary
analysis of pooled information rather than results of a formal clinical
investigation, and are difficult to evaluate because of the absence of matched
controls and pretreatment baseline data for these patients. Nevertheless, the
Company believes it was prudent, in light of this information, to have withdrawn
Redux from the market.

         As reported in the original preliminary information provided by the
FDA, abnormal echocardiogram findings were reported in 92 of 291 subjects
evaluated. As originally reported, 271 of the 291 patients had taken
fenfluramine in combination with phentermine (commonly referred to as the
"fen/phen" combination), 11 had taken Redux alone and nine had taken a
combination of Redux and phentermine. As originally reported, of the 20 who took
Redux alone or in combination with phentermine, six had abnormal
echocardiograms, and two of the six took Redux alone.

         The FDA has continued to evaluate the data from the original 291 cases.
In a recent update, the FDA has reported to the Company that, revising the
originally reported data, of the 291 cases, 15 patients had taken Redux alone
and 21 had taken Redux plus phentermine. Of the 15, two patients had abnormal
echocardiograms and of the 21, 13 patients had abnormal echocardiograms. The
FDA-approved prescribing information (label) for Redux recommended against using
Redux in combination with other appetite suppressants. The Company believes,
based on industry databases, that over 90% of prescriptions written for Redux
were for Redux alone (without a combination with another appetite suppressant).

         Additional adverse event reports of abnormal heart valve findings in
patients using Redux or fenfluramine alone or in combination with other weight
loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the FDA.
These reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.



                                       51

<PAGE>

         Additional echocardiogram studies are being supported by Wyeth-Ayerst
to compare patients who had taken either Redux or the "fen/phen" combination
with a matched group of obese patients who did not receive any anti-obesity
drugs. These studies are being conducted and will be analyzed by an independent,
blinded panel of cardiologists to compare the incidence of significant heart
valve abnormalities in treated compared to non-treated groups. In addition,
Interneuron has initiated a separate study which will also be analyzed by an
independent, blinded panel of cardiologists, that is comparing echocardiograms
of patients who took Redux alone to echocardiograms of a control group of
patients who did not take any anti-obesity medication to measure the prevalence
and severity of abnormal cardiac valvular findings among the two sets of
patients. At least an estimated 300 patients will be included in each of the
Redux and control groups in the Company-supported study, the costs of which are
estimated at up to approximately $4,000,000. A number of other clinical studies
relating to the prevalence of abnormal echocardiogram findings in patients who
took Redux (and other anti-obesity agents) have been and may be conducted by
Wyeth-Ayerst and/or others.

         On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of people
who took Pondimin or Redux. HHS recommended, until more complete information is
available, that patients who took either drug should see their physician to
determine whether there are signs or symptoms of heart or lung disease and if
such person has signs or symptoms of heart or lung disease, such as a new heart
murmur or shortness of breath, have an echocardiogram performed; and that
physicians strongly consider performing an echocardiogram before a patient who
has taken either drug has any invasive procedure for which antibiotic
prophylactic treatment is recommended to prevent the development of bacterial
endocarditis.

         Interneuron has been named, together with other pharmaceutical
companies, as a defendant in approximately 200 legal actions, many of which
purport to be class actions, in federal and state courts involving the use of
Redux and other weight loss drugs. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings. The Company
has also been named as a defendant in several lawsuits filed by alleged
purchasers of the Company's common stock, purporting to be class actions,
claiming violation of the federal securities laws.

         Under certain circumstances, the Company is required to indemnify
Servier, Boehringer Ingelheim Pharmaceuticals, Inc. (the contract manufacturer
of Redux capsules) and AHP, and the Company is entitled to indemnification by
AHP, against certain claims, damages or liabilities incurred in connection with
Redux. The cross indemnification between the Company and AHP generally relates
to the activities and responsibilities of each company. Although the Company
maintains certain product liability and director and officer liability insurance
and intends to defend these and similar actions vigorously, the Company may be
required to devote significant management time and resources to these actions
and, in the event of successful uninsured or insufficiently insured claims, or
in the event a successful indemnification claim was made against the Company,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, the uncertainties associated with
these legal actions have had, and may continue to have, an adverse effect on the
market price of the Company's common stock, and may impair the Company's ability
to obtain additional financing to satisfy cash requirements, to retain and
attract qualified personnel, to commercialize products on a timely and adequate
basis and to acquire or obtain rights to additional products, any or all of
which may materially adversely affect the Company's business. See "Risk
Factors".


                                       52

<PAGE>

         Background; Regulatory Approval, Labeling and Safety Issues: Redux
(dexfenfluramine) is chemically related to Pondimin (fenfluramine). Fenfluramine
is a drug made up of two mirror- image halves - a "right-handed" half (d-isomer)
and "left-handed" half (l-isomer) - and dexfenfluramine is the right-handed
isomer of fenfluramine (the left-handed half is "levofenfluramine").
Dexfenfluramine alone is a separate drug from the combined
dexfenfluramine/levofenfluramine molecule that is fenfluramine.

         Redux received clearance on April 29, 1996 by the FDA for marketing as
a twice-daily prescription therapy to treat obesity. The approved indication was
for the management of obesity, including weight loss and maintenance of weight
loss in patients on a reduced calorie diet who have a body mass index ("BMI") of
greater than or equal to 30 kg/m2 or greater than or equal to 27 kg/m2 in the
presence of other risk factors, such as hypertension, diabetes and elevated
cholesterol. Under license and copromotion agreements, Redux was marketed in the
U.S. until its withdrawal by Wyeth-Ayerst and copromoted by the Company.

         Marketing clearance of Redux by the FDA followed a second meeting of
the Endocrinologic and Metabolic Advisory Committee (the "Advisory Committee")
of the FDA on November 16, 1995 at which time the Advisory Committee
recommended, by a vote of 6 to 5, the approval of Redux to treat obesity. The
Advisory Committee also recommended, and the Company agreed, that Phase 4, or
post-marketing, studies be conducted and that certain labeling guidelines be
implemented. Included in the FDA-approved labeling for Redux were references to
certain risks that may be associated with dexfenfluramine and which were
highlighted during the FDA's review of the drug. One issue relates to whether
there is an association between appetite suppressants, including
dexfenfluramine, and the development of primary pulmonary hypertension ("PPH"),
a rare but serious lung disorder estimated to occur in the general population at
one to two cases per million adults per year. An epidemiologic study conducted
in Europe known as IPPHS (International Primary Pulmonary Hypertension Study)
examined risk factors for PPH and showed that among other factors, weight
reduction drugs, including dexfenfluramine, and obesity itself were associated
with a higher risk of PPH. In the final report of IPPHS, published in the New
England Journal of Medicine (August 29, 1996), the authors re-classified and
included certain previously excluded cases of PPH, resulting in an increase in
the estimated yearly occurrence of PPH for patients taking appetite suppressants
for greater than three months' duration to be between 23 and 46 cases per
million patients per year. The revised labeling for Redux disclosed this revised
estimate.

         The FDA-approved labeling for Redux also includes discussion as to
whether dexfenfluramine is associated with certain neurochemical changes in the
brain. Certain studies conducted by third parties related to this issue purport
to show that very high doses of dexfenfluramine cause prolonged serotonin
depletion in certain animals, which some researchers believe is an indication of
neurotoxicity. The Company has presented data relating to the lack of


                                       53

<PAGE>

neurocognitive effects in patients taking Redux to the FDA and believes that, as
demonstrated in human trials, these animal studies are clinically irrelevant to
humans because of pharmacokinetic differences between animals and humans and
because of the high dosages used in the animal studies. In connection with the
approval of Redux, the Company and Wyeth-Ayerst agreed with the FDA to conduct a
Phase 4, or post marketing, study with patients taking Redux. Following the
withdrawal of Redux, this study was terminated.

         In July 1997, the Mayo Clinic reported observations of heart valve
abnormalities in 24 patients taking the combination of Pondimin and phentermine.
The Mayo Clinic cases were subsequently reported in an article appearing in the
August 28, 1997 issue of The New England Journal of Medicine. This article was
accompanied by a letter to the editor from the FDA reporting additional cases of
heart valve disease in 28 patients taking the combination of phentermine and
fenfluramine, two patients taking fenfluramine alone, four patients taking Redux
alone and two patients taking Redux and phentermine.

         Redux Revenues; Charges to Operations: In connection with the market
withdrawal of Redux, the Company recorded certain charges to operations
aggregating approximately $10,800,000. Of this amount (i) approximately
$3,300,000 (included in cost of revenues) related to reserves for inventories of
dexfenfluramine drug substance and finished Redux capsules which were deemed to
have no net realizable value and (ii) approximately $7,500,000 related to costs
or commitments associated with product development, litigation, cessation of
production of Redux capsules and other related costs. Total expenses relating to
the market withdrawal of Redux may exceed these amounts which are based on
current estimates and do not include provisions for liability, if any, arising
out of Redux-related litigation or other costs which are not currently
determinable.

         The Company does not expect to realize any significant future revenues
related to Redux. A significant portion of Interneuron's revenues had previously
been derived from Redux sales. The Company anticipates that it will not incur
certain previously planned expenses related to the development of a once-a-day
formulation of Redux and other activities relating to Redux.

         The Company's revenues relating to Redux were derived primarily from:
(1) royalties paid by AHP to the Company based on the net sales of Redux
capsules by AHP to distributors; (2) profit sharing between the Company and AHP
on Redux sales by the Company's sales force and financial support of the
Company's sales force provided by AHP; and (3) sales of Redux capsules to AHP.

         Under the Company's license agreement with AHP the Company received (i)
"base" royalties equal to 11.5% of AHP's net sales (an amount equal to the
royalty required to be paid by the Company to Les Laboratoires Servier, a French
pharmaceutical company from which the Company obtained U.S. rights to Redux to
treat abnormal carbohydrate craving and obesity ("Servier"), and (ii)
"additional" royalties based on net sales of Redux by AHP. The Company
recognized royalty revenue and associated expense in the fiscal quarter when AHP
reported to Interneuron AHP's shipments to distributors. Accordingly, such
revenue was reported by the Company in the quarter following actual shipments by
AHP.


                                       54

<PAGE>

         Because Redux was scheduled as a controlled substance, and the Company
manufactured the finished dosage formulation of the drug the following sets
forth the annual additional royalty rates applicable on net sales during fiscal
1997:

                  First $50,000,000                   5.0%
                  Next $100,000,000                   8.0%
                  Over $150,000,000                  10.0%

         Under a three-year copromotion agreement entered into in June 1996 with
Wyeth-Ayerst, and to supplement AHP's marketing efforts, the Company had
developed an approximately 30- person sales force that promoted Redux to
selected diabetologists, endocrinologists, bariatricians, nutritionists and
weight management specialists, subject to certain restrictions, in return for a
percentage of resulting revenues less certain expenses. Although a portion of
the Company's copromotion costs related to the sales force was funded by AHP,
the Company incurred substantial additional costs relating to its sales force
and in connection with the promotion of Redux.

         Under a manufacturing agreement with Boehringer, Boehringer had
manufactured finished dosage formulation of Redux capsules on behalf of the
Company for sale to AHP. The Company recognized revenue from the sale of these
capsules upon acceptance by AHP, typically 45 days after shipment.

      CerAxon

     The Company's principal product under development is CerAxon (citicoline)
and in December 1997 the Company submitted an NDA to the FDA for CerAxon to
treat ischemic stroke. Data in the NDA include the results of Phase 3 clinical
trials conducted by Interneuron in the U.S., supporting data from a Japanese
clinical trial conducted by Takeda Chemical Industries, Ltd. and supportive
clinical and post-marketing data from more than 30 countries where citicoline
has already been approved. The Company is unable to predict whether or when the
NDA for CerAxon will be accepted for filing by the FDA or whether the FDA will
grant authorization to market CerAxon in the U.S.

     The Company is also conducting several Phase 3b clinical trials to study
CerAxon, two of which are expected to extend into fiscal 1999 (the "Fiscal 1999
Phase 3 Trials"). The Fiscal 1999 Phase 3 Trials are exploring stroke recovery
and reduction in infarct size and are expected to enroll up to an aggregate of
approximately 800 patients and be completed in fiscal 1999. The Company may
initiate further studies beginning in fiscal 1998 or fiscal 1999 to explore
areas such as post-stroke learning and memory, combination with thrombolytic
therapies and other clinical paradigms such as treatment or prevention of
peri-operative strokes and treatment of head trauma.



                                       55

<PAGE>

     As of September 30, 1997, the remaining expenditures of all currently
planned clinical trials and related studies and the preparation of the NDA are
estimated, based upon current trial protocols, to aggregate approximately
$25,000,000. The Company is unable to predict with certainty the costs of any
related or additional clinical studies which will depend upon the results of the
on-going trials and upon FDA requirements.

         Activase, a thrombolytic agent, is marketed by Genentech, Inc. as a
treatment for stroke. This drug is currently labeled for administration within
three hours of the onset of a stroke. To the Company's knowledge, Janssen
Pharmaceutical NV filed an NDA for a stroke treatment known as Prosynap
(lubeluzole), although an FDA advisory committee hearing scheduled to review the
drug was recently cancelled. A number of products are in clinical development
pursuing an indication for stroke which could also compete with CerAxon. Based
on CerAxon clinical data to date, the Company believes CerAxon may be an
attractive post-stroke therapy, particularly for moderate to severe strokes, due
to its potentially broader, 24-hour post-stroke therapeutic window and its
possible use in combination with other therapies.

         Manufacturing and Marketing: The Company is currently evaluating the
commercialization strategy for CerAxon, subject to required regulatory
approvals. The Company is currently planning to conduct sole direct marketing of
the product but may consider a combined marketing strategy which includes
contracting with certain companies for the copromotion of the product and/or
establishing a contract salesforce for certain market segments. The Company
expects that it will be required to expand its sales force by an additional
approximately 200 representatives, to hire additional headquarters-based
medical, marketing and administrative support personnel and to establish
distribution arrangements. In the event the Company markets CerAxon directly,
significant funds would be required for manufacturing, distribution, marketing
and selling efforts.

         The Company is dependent upon third party suppliers of citicoline bulk
compound and finished product for manufacturing in accordance with the Company's
requirements and U.S. Good Manufacturing Practices ("GMP") regulations. Supplies
of citicoline finished products used for clinical purposes have been produced on
a contract basis by a third party manufacturer. The Company is subject to an
agreement with Grupo Ferrer ("Ferrer"), a Spanish pharmaceutical company which
licensed certain patent rights relating to citicoline to the Company, requiring
the Company to purchase citicoline bulk compound for commercial purposes at
fixed prices, subject to certain conditions. To date, Ferrer's manufacturing
facility has not been inspected by the FDA for a U.S. marketed product, but is
expected to undergo such an inspection in conjunction with the FDA's review of
the CerAxon NDA submitted by the Company. There can be no assurance the Company
can or will establish on a timely basis, or maintain, manufacturing capabilities
of bulk compound and finished product required to obtain regulatory approval of
CerAxon or that any facilities used to produce citicoline will have complied, or
will be able to maintain compliance, with GMP. See "Risk Factors --
Uncertainties Relating to CerAxon" and "Funding Requirements".


                                       56

<PAGE>

      The Company licensed from Ferrer certain patent and know how rights in the
United States and Canada relating to the use of citicoline in exchange for a
royalty equal to 6% of the Company's net sales of CerAxon.

Results of Operations

Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996

      Total revenues increased $45,366,000, or 202%, to $67,863,000 in fiscal
1997 from $22,497,000 in fiscal 1996 reflecting product revenue of $56,824,000,
primarily from a full year of Redux sales, and $11,039,000 of contract and
license fee revenue.

      Product revenue increased $42,662,000, or 301%, to $56,824,000 in fiscal
1997 from $14,162,000 in fiscal 1996. This increase includes a $29,485,000
increase in Redux royalty revenue to $34,968,000 in fiscal 1997 from $5,483,000
in fiscal 1996 and a $12,387,000 increase in sales of Redux capsules and
dexfenfluramine drug substance to $20,697,000 in fiscal 1997 from $8,310,000 in
fiscal 1996 reflecting a full year of Redux sales compared to approximately one
fiscal quarter of Redux sales in fiscal 1996. Fiscal 1998 product revenue is
expected to decrease substantially as a result of the market withdrawal of Redux
in September 1997. See Note H of Notes to Consolidated Financial Statements.

      Contract and license fee revenue increased $2,704,000, or 32%, to
$11,039,000 in fiscal 1997 from $8,335,000 in fiscal 1996. This increase
primarily reflects initial payments received pursuant to the Merck Agreement, a
full year of revenues derived under the Copromotion Agreement with AHP compared
to approximately one fiscal quarter of such revenues in fiscal 1996, and the
initial license fee received from Lilly, partially offset by reduced revenue
from Intercardia's bucindolol-related license agreements.

      Total costs and expenses increased $72,631,000, or 132%, to $127,823,000
in fiscal 1997 from $55,192,000 in fiscal 1996. Cost of product revenue,
primarily attributable to Redux, increased $29,879,000, or 257%, to $41,496,000
in fiscal 1997 from $11,617,000 in fiscal 1996 and constituted 41% of the
increase in total costs and expenses. Included in cost of product revenue is
approximately $3,300,000 related to reserves for inventories which were deemed
to have no net realizable value after the withdrawal of Redux. Research and
development expenses increased substantially in fiscal 1997 from fiscal 1996
primarily reflecting increased costs related to the development of, and NDA
preparation for, CerAxon and a $10,000,000 accrual related to Intercardia's
contractual obligation to Astra Merck. In addition, the Company incurred charges
to operations aggregating approximately $7,500,000 relating to the market
withdrawal of Redux. See Note H of Notes to Consolidated Financial Statements.
Cost of product revenue during fiscal 1998 will reflect reduced costs associated
with Redux as a result of the market withdrawal of Redux offset in part by
increased costs associated with InterNutria's national launch of PMS Escape,
which commenced in September 1997.

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<PAGE>

     Research and development expenses increased $33,041,000, or 185%, to
$50,865,000 in fiscal 1997 from $17,824,000 in fiscal 1996. Increased research
and development expenses resulted primarily from the conduct of two phase 3
clinical trials and NDA preparation for CerAxon and Intercardia's accrual in
fiscal 1997 of its $10,000,000 commitment to be paid to Astra Merck in December
1997. In fiscal 1997, the Company and AHP had commenced development of a
sustained release formulation of Redux and incurred related clinical development
costs and paid license fees to Servier. This development program terminated as a
result of the Redux withdrawal. Additional expenses were incurred by Transcell
pursuant to its increased carbohydrate chemistry development activities and by
the other Subsidiaries on their technologies and products.

     Selling, general and administrative expenses increased $7,723,000, or 45%,
to $24,890,000 in fiscal 1997 from $17,167,000 in fiscal 1996. Increased sales
and marketing expenses were incurred by Interneuron in fiscal 1997 as a result
of maintaining its approximately 30 person salesforce for the copromotion of
Redux for the full 1997 fiscal year compared to approximately one fiscal quarter
in fiscal 1996, and by InterNutria for the test-marketing of PMS Escape and
preliminary marketing efforts for its sports supplements. Increased facilities
expenses were incurred by Interneuron and Transcell related to their respective
moves into expanded facilities in late fiscal 1997. Also, the Company's growth
has resulted in increased numbers of employees and additional administrative,
consulting, insurance and payroll-related costs. Partially offsetting these
increased expenses is a reduction in Progenitor expenses resulting from a
non-recurring fiscal 1996 charge for expenses relating to its then-postponed IPO
and its inclusion in the Company's consolidated statement of operations until
mid August 1997 as a result of the Progenitor IPO. See Note N of Notes to
Consolidated Financial Statements. InterNutria is expected to incur substantial
increases in selling and marketing expenses in Fiscal 1998 due to its September
1997 national launch of PMS Escape. Subsequent to the market withdrawal of
Redux, the Company's sales force has been promoting PMS Escape, a dietary
supplement marketed by InterNutria.

     Purchase of in-process research and development decreased $5,540,000, or
65%, to $3,044,000 in fiscal 1997 from $8,584,000 in fiscal 1996. Fiscal 1997
expenses primarily reflected charges from the Company's open-market purchases of
Intercardia common stock and fiscal 1996 expenses primarily reflected charges
from the Company's acquisitions of the 20% of CPEC not owned by Intercardia and
of the technology and know-how to produce a specially- formulated dietary
supplement for women's use during their premenstrual period leading to the
product PMS Escape. Both fiscal 1996 acquisitions that resulted in charges for
in-process research and development were made primarily in exchange for
Interneuron Common Stock which did not require the use of cash.

     Investment income, net of interest expense, increased $4,690,000, or 113%,
to $8,825,000 in fiscal 1997 from $4,135,000 in fiscal 1996 primarily due to
significantly higher invested balances of cash, cash equivalents and marketable
securities resulting primarily from funds received from public offerings in
fiscal 1996 by Interneuron and Intercardia.


                                       58

<PAGE>

     Equity in net loss of unconsolidated subsidiary of $9,028,000 reflects the
Company's equity in the net loss of Progenitor, an unconsolidated subsidiary,
subsequent to the Progenitor IPO in mid August 1997, and includes approximately
$7,800,000 relating to the Company's equity in Progenitor's charge for acquired
in-process research and development resulting from Progenitor's acquisition of
Mercator. Results of Progenitor's operations prior to the Progenitor IPO are
included in the Company's Consolidated Statements of Operations. See Note N of
Notes to Consolidated Financial Statements.

     The allocation of losses from certain consolidated subsidiaries to their
respective minority stockholders increased $4,333,000 to $4,907,000 in fiscal
1997 from $574,000 in fiscal 1996 substantially due to the increased Intercardia
loss resulting primarily from the $10,000,000 fiscal 1997 accrual pertaining to
Intercardia's commitment to Astra Merck.

     Net loss increased $27,270,000, or 97%, to ($55,256,000) in fiscal 1997
from ($27,986,000) in fiscal 1996. Net loss per share increased to ($1.35) in
fiscal 1997 from ($.76) in fiscal 1996 also reflecting an increase in weighted
shares outstanding to 41,064,000 in fiscal 1997 from 37,004,000 in fiscal 1996
resulting from additional equity issuances.

     As a result of the adoption of the Company's 1997 Equity Incentive Plan and
in connection with the granting of Restricted Stock Awards thereunder in
November 1997 (see Note O of Notes to Consolidated Financial Statements), the
Company expects to incur noncash charges aggregating approximately $15,500,000
of which approximately $11,000,000 is expected to be incurred in fiscal 1998 and
the remainder through fiscal 2000. In addition, the Company will incur charges
to operations in connection with the proposed acquisition by Intercardia of
Transcell, currently estimated to range from approximately $6,000,000 to
$8,000,000 in the period in which the closing occurs, and future charges
relating to certain option grants in connection with the acquisition. The
Company will allocate a portion of such charges to minority interest.

Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995

     Total revenues increased $19,034,000 to $22,497,000 in fiscal 1996 from
$3,463,000 in fiscal 1995 reflecting $14,162,000 in product revenue (primarily
from initial sales of Redux) and $8,335,000 in contract and license fee revenue.

     Product revenue of $14,162,000 in fiscal 1996 consisted primarily of
$8,348,000 of sales of Redux capsules and dexfenfluramine drug substance to AHP
and $5,488,000 of total royalties received by Interneuron from AHP based upon
AHP-reported net sales of Redux for the quarter ended June 30, 1996. See Note B
of Notes to Consolidated Financial Statements.

     Contract and license fee revenue increased $4,872,000, or 141%, to
$8,335,000 in fiscal 1996 from $3,463,000 in fiscal 1995. This increase reflects
primarily $5,000,000 received by Intercardia pursuant to the Astra Merck
Collaboration, revenues derived under the copromotion agreement with AHP to
support Interneuron's sales force and a milestone payment from AHP paid upon the


                                       59

<PAGE>

marketing approval of Redux. Partially offsetting these increases is a net
reduction of $2,000,000 pertaining to payments made to Progenitor in fiscal 1995
pursuant to Progenitor's license agreement with Chiron.

     Total costs and expenses increased $32,291,000 or 141%, to $55,192,000 in
fiscal 1996 from $22,901,000 in fiscal 1995. For the first time, during fiscal
1996, the Company incurred cost of product revenue, aggregating $11,617,000 and
representing 36% of the increase in total costs and expenses. Cost of product
revenue consisted primarily of cost of Redux capsules and dexfenfluramine drug
substance sold to AHP and royalties paid to Servier on total net sales of Redux.
The Company also incurred charges of $8,584,000 relating to the purchase of
in-process research and development, which represented 27% of the increase in
total costs and expenses. The charges for the purchase of in-process research
and development, of which $8,098,000 was noncash, related primarily to (i)
Interneuron's acquisition of the remaining 20% of CPEC not owned by Intercardia
in exchange for the issuance of 342,792 shares of Interneuron Common Stock and
(ii) the Company's acquisition of technology and know-how to produce a
specially-formulated dietary supplement for women's use during their
pre-menstrual period (PMS Escape) in exchange for the issuance of Interneuron
Common Stock in December 1996 and 1997. See Note M of Notes to Consolidated
Financial Statements.

     Research and development expenses increased $2,656,000, or 18%, to
$17,824,000 in fiscal 1996 from $15,168,000 in fiscal 1995. This increase is due
primarily to increased license fees, patent expenses and milestones related to
certain products in various stages of development and increased product
development expenses relating to antioxidant small molecules, Melzone, PMS
Escape and other products and compounds. Research and development expenses in
fiscal 1996 of $17,824,000 was comprised primarily of Interneuron's costs to
develop citicoline, dexfenfluramine and pagoclone and the subsidiaries' costs to
develop their technologies, including Intercardia's efforts to develop
bucindolol.

     Selling, general and administrative expense increased $9,434,000, or 122%,
to $17,167,000 in fiscal 1996 from $7,733,000 in fiscal 1995. These increase
reflects increased expenses from the Subsidiaries, including the addition of
management personnel by Intercardia and InterNutria, costs relating to
InterNutria's commencement of a regional test launch of PMS Escape and related
sales, marketing and public relations expenses and costs relating to a proposed
initial public offering by Progenitor. During the quarter ended June 30, 1996,
Interneuron hired an approximately 30 person sales force to copromote Redux
along with Wyeth-Ayerst and incurred related hiring and carrying costs.

     Investment income, net increased $3,241,000, or 363%, to $4,135,000 in
fiscal 1996 from $894,000 in fiscal 1995. This increase is due to substantially
higher weighted average invested cash balances resulting primarily from proceeds
from Interneuron's and Intercardia's public offerings and the exercise of
Interneuron's Class B Warrants and other warrants and options.

     Net loss increased $10,005,000 or 56%, to ($27,986,000) in fiscal 1996 from
($17,981,000) in fiscal 1995. Net loss per share increased to ($0.76) in fiscal
1996 from ($0.59) in fiscal 1995. Weighted average common shares increased in
the fiscal 1996 periods reflecting additional equity issuances.




                                       60
<PAGE>

     The Company from time to time explores various technology, product or
company acquisitions and/or business combinations or financing opportunities and
is currently engaged in discussions relating to such opportunities. Any such
initiatives may involve the issuance of shares of Interneuron's Common Stock or
other securities and/or cash and financial commitments for licensing fees and/or
to fund product development, either of which may adversely affect the Company's
consolidated financial condition or results of operations.

Liquidity and Capital Resources

      Cash, Cash Equivalents and Marketable Securities


                                       61

<PAGE>

     At September 30, 1997, the Company had consolidated cash, cash equivalents
and marketable securities aggregating $140,052,000 (of which approximately
$37,000,000 is held by Intercardia) compared to $169,608,000 at September 30,
1996. The primary components of this decrease were approximately $19,897,000
used by operating activities and approximately $10,500,000 used for open-market
purchases of Interneuron Common Stock and Intercardia common stock and purchases
of Progenitor IPO Units. See Notes I and N of Notes to Consolidated Financial
Statements.

     Clinical Studies

     The Company is expending substantial amounts for the development and
regulatory approval of CerAxon and, in December 1997 submitted an NDA to the FDA
relating to CerAxon, as discussed under "CerAxon".

     The Company is also incurring substantial costs to develop pagoclone for
which a Phase 2/3 trial commenced in November 1996. The Company designates a
trial as Phase 2/3 if it is a well-controlled trial which the Company may
utilize, depending upon results, as either a pivotal or supporting trial in an
NDA submission. The Company currently estimates the total costs of certain
clinical studies, license fees to Rhone-Poulenc Rorer Pharmaceuticals, Inc., and
NDA preparation for pagoclone to be approximately $40,000,000, which will be
incurred over approximately the next three years. The Company is unable to
predict with certainty the costs of any related or additional studies which may
be required by the FDA, whether any such clinical trials will be successful or
result in FDA approval of the product. Further, in the event the Company markets
pagoclone directly, significant additional funds would be required for
manufacturing, distribution and selling efforts.

     In December 1996, the Company entered into an agreement with Algos
Pharmaceutical Corporation to collaborate in the development and
commercialization of LidodexNS, which combines two drugs that are currently
marketed for other indications. This combination product is in pre-clinical
development for the acute intra-nasal treatment of migraine headaches. The
development of this and other products, including those which may be acquired by
the Company in the future will require substantial additional funds.

     There can be no assurance that results of any on-going current or future
preclinical or clinical trial will be successful, that additional trials will
not be required, that any drug under development will receive FDA approval in a
timely manner or at all, or that such drug could be successfully manufactured in
accordance with good manufacturing practice regulations or marketed in a timely
manner or at all, any of which could materially adversely affect the Company.

           Analysis of Cash Flows

      Cash used by operating activities during fiscal 1997 of $19,897,000
consisted primarily of a net loss of $55,256,000, $4,907,000 from the Company's
allocation of subsidiaries' net


                                       62

<PAGE>

losses/income to their respective minority stockholders, $2,234,000 relating to
the allocation of a portion of the cost of the Company's open-market purchases
of Intercardia common stock to the purchase of in-process research and
development, $9,028,000 from the Company's equity in the net loss of Progenitor
subsequent to the Progenitor IPO in mid August 1997, and net changes in assets
and liabilities of approximately $27,000,000.

     Cash used by investing activities of $70,281,000 during fiscal 1997
consisted primarily of net purchases of marketable securities of $60,440,000,
purchases of property and equipment of $3,273,000 and the Company's $2,951,000
open-market purchases of Intercardia common stock and $3,500,000 purchase of
Progenitor IPO Units.

     Cash provided by financing activities of $97,000 during fiscal 1997
consisted primarily of inflows of $2,819,000 from issuances of common and
treasury stock and $1,636,000 from sales and leasebacks of fixed assets
essentially offset by $3,978,000 used to purchase treasury stock.

      Other

      Treasury Stock and Share Repurchases: In March 1997, the Company announced
that its Board of Directors had authorized it to repurchase from time to time
through open-market transactions up to 1,500,000 shares of the Company's Common
Stock. As of September 30, 1997, the Company had repurchased 217,500 shares, for
an aggregate purchase price of approximately $3,978,000, of which 147,017 shares
were re-issued pursuant to stock option and warrant exercises and an employee
stock purchase plan. The Company did not repurchase any shares of the Company's
Common Stock in the fourth quarter of fiscal 1997.

      Open-Market Purchases of Intercardia Common Stock: In February 1997, the
Company announced that its Board of Directors had authorized it to purchase from
time to time through open-market transactions up to 200,000 shares of the common
stock of Intercardia. As of September 30, 1997, the Company had purchased
129,400 shares of Intercardia common stock, for an aggregate purchase price of
approximately $2,951,000, of which approximately $2,234,000 was recorded as
purchase of in-process research and development in Fiscal 1997. As a result of
these purchases, the Company's ownership of Intercardia increased from
approximately 60% at September 30, 1996 to approximately 61% at September 30,
1997 based upon the number of outstanding shares of Intercardia at such dates.
The Company did not purchase any shares of Intercardia common stock in the
fourth quarter of fiscal 1997.

     Call Options: In May 1997, the Company purchased in private transactions
from Swiss Bank Corporation, London Branch ("SBC") capped call options, which
were modified in September 1997, on Interneuron Common Stock. As modified, these
call options give Interneuron the right to purchase from SBC up to a total of
1,240,000 shares of Interneuron Common Stock at a strike price of $14.50. The
call options are exercisable only at their maturities, which are December 31,
1997, June 9, 1998, September 21, 1998 and January 11, 1999 each with respect to
310,000 shares, and are subject to caps of $22.50, $29.50, $32.50 and $34.50,
respectively, which limit the potential economic benefit to the Company of these
call options if exercised. The call options which the Company purchased may be
settled, if exercised, with cash or Common Stock in an amount equal to the
difference between the strike price and the market price, determined over a
specified valuation period, subject to the caps. Under certain


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<PAGE>

circumstances, the Company may delay the expiration date of these call options
for the payment of additional consideration to SBC.

     In exchange for the purchases of these call options, in lieu of cash
purchase prices, the Company sold to SBC call options entitling SBC to purchase
from the Company at a strike price of $36.00 per share, an aggregate of
2,000,000 shares of Interneuron Common Stock, 1,000,000 shares on each of
December 30 and 31, 1999. Modification to the original options, which consisted
of extensions of maturity dates and reductions of the caps and strike prices,
resulted in a $500,000 cash payment to the Company reflected as a credit to
additional paid-in capital. The Company will have the right to settle these call
options with cash or stock, subject to certain conditions. If exercised, the
Company expects to settle the call options that it sold through issuances by the
Company to SBC of up to an aggregate of 2,000,000 shares of Interneuron Common
Stock, subject to the effectiveness of a registration statement covering the
resale of these shares delivered. Because the Company has the ability to settle
call options through issuance or receipt of Common Stock, the Company has
accounted for the original purchases and sales of these call options as
equivalent and offsetting noncash equity transactions. Any gains realized from
purchased call options will be reflected in additional paid-in capital.

     SBC has advised that it has engaged, and may engage, in transactions,
including buying and selling shares of the Company's Common Stock, to offset its
risk relating to the options. Purchases and sales could affect the market price
of the Company's Common Stock.

     Recent Accounting Pronouncements: The Company will adopt SFAS No. 128
"Earnings Per Share" ("SFAS No. 128"), in the fiscal quarter ending December 31,
1997. SFAS No. 128 requires the company to change its method of computing,
presenting and disclosing earnings per share information. Upon adoption, all
prior period data presented will be restated to conform to the provisions of
SFAS No. 128. Management does not believe there will be a material impact from
the adoption of SFAS No. 128.

     The Company will adopt SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management
has not determined the effect of adopting SFAS No. 130.

     The Company will adopt SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), in the fiscal year ending
September 30, 1999. SFAS No. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. Management has not determined the effect of adopting SFAS No. 131.

     General: The Company's business strategy includes evaluation of various
technologies, product or company acquisitions, licensing and/or financing
opportunities (including private placements and initial and follow-on equity
offerings) and the Company and certain of its subsidiaries are currently engaged
in discussions relating to such opportunities. Any such initiatives may involve
the issuance of securities of Interneuron or its subsidiaries and/or financial
commitments and would result in increased expenses, on a consolidated basis.

     While the Company believes it has sufficient cash for the next 12 months,
it may seek additional funds through other equity and/or debt financings and
corporate collaborations to provide working capital. Further, the Company may
require additional funds for the manufacturing and marketing of CerAxon and, if
such funds are not available, the Company may be required to delay product
launch, reduce launch and marketing efforts, or enter into a corporate
collaboration, any of which may result in the Company generating less revenue
and eventually, reduced profitability from CerAxon than if the Company were able
to launch the product on a timely basis and conduct sole marketing. As a result
of the uncertainties and costs associated with the Redux-related litigation and
other factors generally affecting the ability to raise additional funds, there
can be no assurance that the Company will be able to obtain additional financing
to satisfy cash requirements or that if available, any financing will be on
terms favorable to the Company. 

     In addition, certain subsidiaries are exploring various financings
(including issuances of securities of the subsidiaries, possibly in combination
with securities of Interneuron, in public offerings or private placements),
collaborations or business combinations. If such efforts are not successful,
certain activities at these subsidiaries may be reduced.

     Although Interneuron may acquire additional equity in subsidiaries through
participation in financings, purchases from third parties, including open market
purchases and conversion of intercompany debt, equity financings by a subsidiary
will likely reduce Interneuron's percentage ownership of that subsidiary and
funds held by the subsidiaries will not be available to Interneuron. The
Company's goal is for its subsidiaries to establish independent operations and
financing through corporate alliances, third-party financings, mergers or other
business combinations, with Interneuron generally retaining an ongoing equity
interest. The nature of any


                                       64

<PAGE>

such transaction is expected to vary depending on the business and capital needs
of each subsidiary and the state of development of their respective technologies
or products.

     Subsidiaries

     Interneuron is currently funding operations of Transcell and InterNutria
and had funded the operations of Progenitor through the closing of the
Progenitor IPO. See Note N of Notes to Consolidated Financial Statements. In the
event the Proposed Transcell Acquisition is completed, the costs of Transcell's
operations will be assumed by InterCardia. Expenses of the Subsidiaries,
including those required under collaboration agreements, constitute a
significant part of the Company's overall expenses. The Subsidiaries' portion of
consolidated research and development and selling, general and administrative
expenses in fiscal 1997 and 1996 was approximately 49% and 56%, respectively.

     Intercardia

     Pursuant to the Astra Merck Collaboration, Intercardia agreed to pay Astra
Merck $10,000,000 in December 1997 and up to $11,000,000 for one-third of
product launch costs for bucindolol incurred beginning when Intercardia files an
NDA with the FDA for the twice- daily formulation of bucindolol and continuing
through the first 12 months subsequent to the first commercial sale of the
twice-daily formulation. See Note L of Notes to Consolidated Financial
Statements. At September 30, 1997, Intercardia accrued as an expense and
reflected as a liability the $10,000,000 payment made to Astra Merck in December
1997. In the event Intercardia elects not to make any of these payments, the
royalties payable by Astra Merck to Intercardia would be substantially reduced.
There can be no assurance of the success of the Beta-blocker Evaluation of
Survival Trial (the "BEST Study") or that bucindolol will be successfully
commercialized. A substantial portion of the bucindolol development costs are
being assumed and paid by the National Institutes of Health, the Department of
Veterans Affairs, Astra Merck and Knoll.

     Pursuant to the Knoll Collaboration, Intercardia is responsible for
approximately 40% of the development and marketing costs of bucindolol in the
Territory, which includes all countries other than the United States and Japan,
subject to certain maximum dollar limitations. See Note L of Notes to
Consolidated Financial Statements. The Company's portion of development and
clinical trial costs for the Territory is estimated to be up to $10,000,000.
Intercardia is also responsible for approximately 40% of the once-a-day
development costs which relate to development solely for the Territory and
approximately 67% of once-a-day development costs which have a worldwide
benefit.

     In May 1997, the FDA approved the use in the United States of Coreg
(carvedilol), a competitive drug being developed by SmithKline Beecham, for the
treatment of congestive heart failure. SmithKline Beecham is currently marketing
Coreg in the United States and a number of other countries. The Company is
unable to predict the impact of this product on bucindolol, if bucindolol is
approved by the FDA.

      Progenitor

      In August 1997, Progenitor completed an initial public offering of
2,750,000 units, plus an additional 125,000 units resulting from a partial
exercise of the underwriters' over allotment


                                       65

<PAGE>

option, at $7.00 per unit, each unit consisting of one share of Progenitor
common stock and one five-year warrant to purchase one share of Progenitor
common stock at $10.50 per share (the "Progenitor IPO"). The Progenitor IPO
resulted in net proceeds to Progenitor of approximately $17,200,000. Interneuron
purchased 500,000 units of the Progenitor IPO for a total of $3,500,000.
Concurrent with the Progenitor IPO, Progenitor sold 1,023,256 shares of
Progenitor common stock to Amgen pursuant to a stock purchase agreement for a
purchase price of $4,500,000 in cash and a $1,000,000 promissory note.
Concurrent with the closing of the Progenitor IPO, Progenitor completed an
acquisition (the "Mercator Acquisition") with Mercator Genetics, Inc.
("Mercator") for an aggregate purchase price of approximately $24,000,000,
including related transaction costs, paid with the issuance of approximately
3,443,000 shares of Progenitor common stock, plus the assumption of Mercator
liabilities, forgiveness of debt relating to advances made by Progenitor to
Mercator and the issuance of stock options and warrants. Interneuron's ownership
in Progenitor's outstanding capital stock decreased from approximately 76% at
September 30, 1996 to approximately 37% at September 30, 1997 principally due to
the Progenitor IPO and the Mercator Acquisition. As a result of the Company's
decreased percentage of ownership in Progenitor, as of the date of the
Progenitor IPO and Mercator Acquisition, the Company ceased consolidating the
financial statements of Progenitor and commenced including Progenitor in the
Company's financial statements using the equity method of accounting.

      In connection with the Mercator Acquisition, Progenitor incurred charges
to operations in fiscal 1997 related to the purchase of in-process research and
development. For the fiscal year ended September 30, 1997, approximately
$7,800,000 of these charges are included in equity in net loss of unconsolidated
subsidiary of $9,028,000, based on the Company's ownership interest in
Progenitor. As a result of the Progenitor IPO and Interneuron's purchase of
500,000 units thereof, Interneuron recognized a gain on its investment in
Progenitor of approximately $7,291,000 which has been recorded as an increase in
the Company's additional paid-in capital. At September 30, 1997, the Company's
investment in Progenitor is reflected in investment in unconsolidated subsidiary
at $4,040,000. In connection with the Progenitor IPO, Interneuron contributed
outstanding intercompany loans to Progenitor's capital.

      Transcell

      Merck Agreement: In July 1997, Transcell and Interneuron entered into a
Research Collaboration and Licensing Agreement with Merck & Co., Inc. ("Merck")
to discover and commercialize certain novel antibacterial agents. Merck has an
option to extend the field of the collaboration and license to include all
antibacterial pharmaceutical products. Merck made initial payments totaling
$2,500,000 of which $1,500,000 was recognized as license fee revenue in fiscal
1997 and $1,000,000 is being recognized as license fee revenue ratably over the
estimated twelve month option period commencing in July 1997. Additionally,
Merck agreed to provide research support for the first two years of the
agreement and make payments based upon achievement of certain defined clinical
development and regulatory milestones and pay royalties based upon net sales of
products resulting from the collaboration. Certain of the rights licensed to
Merck are based on exclusive licenses or rights held by Transcell and
Interneuron from Princeton University, which will be entitled to varying
percentages of certain payments and royalties received from Merck.

      Proposed sale of Transcell to Intercardia: On November 5, 1997,
Intercardia, Interneuron and Transcell, a majority-owned subsidiary of
Interneuron, entered into a letter of intent ("Letter of


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Intent") relating to the proposed acquisition by Intercardia of Transcell and
certain related technology rights owned by Interneuron (the "Proposed Transcell
Acquisition") in exchange for Intercardia common stock with an aggregate market
value as of November 5, 1997 of approximately $15,000,000 and the issuance of
options to purchase Intercardia common stock to Transcell employees and
consultants, with an aggregate market value as of November 5, 1997 of
approximately $3,000,000 to $4,000,000. The Proposed Transcell Acquisition is
subject to final due diligence, execution of definitive agreements and approval
by Transcell and Intercardia stockholders. In connection with the Proposed
Transcell Transaction, Intercardia and Interneuron will incur charges to
operations during the period in which the Closing occurs currently estimated to
range from approximately $6,000,000 to $8,000,000 and will incur additional
future charges relating to certain stock options to be issued pursuant to the
Proposed Transcell Transaction. The Company will allocate a portion of such
charges to minority interest. See Note O of Notes to Consolidated Financial
Statements.

         InterNutria

         InterNutria recently concluded a preliminary analysis of data from a
clinical evaluation of PMS Escape and commenced a national launch of PMS Escape
in September 1997. Selling and marketing costs associated with this launch are
estimated to be approximately $13,000,000 through early 1998 and are being
funded by Interneuron. InterNutria currently has an approximately 43-person
sales force, retained on a contract basis, targeting obstetricians and
gynecologists, as well as retail accounts. In addition, Interneuron's sales
force, numbering approximately 25, is currently under contract to InterNutria in
connection with the national marketing of PMS Escape. Any broader commercial
marketing, including distribution and order fulfillment, is similarly expected
to be conducted on a contract basis. The Company anticipates that, at least
through fiscal 1998, it will not generate sufficient revenues from this product
to offset related costs.

Item 8.  Financial Statement and Supplementary Data

         The response to this item is included in a separate section of this
Report. See Index to Consolidated Financial Statements on Page F-1.

Item 9. Changes and Disagreements with Accountants on Accounting and Financial
                Disclosure

         Not applicable.


PART III

         The information called by Item 10: Directors and Executive Officers of
the Registrant; Item 11: Executive Compensation; Item 12: Security Ownership of
Certain Beneficial Owners and Management; and Item 13: Certain Relationships and
Related Transactions will be included in and is incorporated by reference from
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the close of its fiscal year.

RISK FACTORS


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         Risks Relating to Withdrawal of Redux and Legal Proceedings. Product
Withdrawal: On September 15, 1997, the Company announced the withdrawal of the
weight loss medication, Redux. Simultaneously, Wyeth-Ayerst announced withdrawal
of the weight loss medication Pondimin. On September 12, 1997, the FDA provided
the Company and Wyeth-Ayerst and manufacturers and marketers of phentermine with
new, preliminary and summary information (which has recently been updated and
revised by the FDA) concerning potential abnormal echocardiogram findings in
patients using these drugs. These patients had been treated with fenfluramine or
Redux for up to 24 months, most often in combination with phentermine. Redux was
launched in June 1996.

         These observations presented by the FDA reflected a preliminary
analysis of pooled information rather than results of a formal clinical
investigation, and are difficult to evaluate because of the absence of matched
controls and pretreatment baseline data for these patients. Nevertheless, the
Company believes it was prudent, in light of this information, to have withdrawn
Redux from the market.

         As reported in the original preliminary information provided by the
FDA, abnormal echocardiogram findings were reported in 92 of 291 subjects
evaluated. As originally reported, 271 of the 291 patients had taken
fenfluramine in combination with phentermine (commonly referred to as the
"fen/phen" combination), 11 had taken Redux alone and nine had taken a
combination of Redux and phentermine. As originally reported, of the 20 who took
Redux alone or in combination with phentermine, six had abnormal
echocardiograms, and two of the six took Redux alone.

         The FDA has continued to evaluate the data from the original 291 cases.
In a recent update, the FDA has reported to the Company that revising the
originally reported data, of the 291 cases, 15 patients had taken Redux alone
and 21 had taken Redux plus phentermine. Of the 15, two patients had abnormal
echocardiograms and of the 21, 13 patients had abnormal echocardiograms. The
FDA-approved prescribing information (label) for Redux recommended against using
Redux in combination with other appetite suppressants.

         Additional adverse event reports of abnormal heart valve findings in
patients using Redux or fenfluramine alone or in combination with other weight
loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the FDA.
These reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.

         Additional echocardiogram studies are being supported by Wyeth-Ayerst
to compare patients who had taken either Redux or the "fen/phen"combination with
a matched group of obese patients who did not receive any anti-obesity drugs.
These studies are being conducted and will be analyzed by an independent,
blinded panel of cardiologists to compare the incidence of significant heart
valve abnormalities in treated compared to non-treated groups. In addition,
Interneuron has initiated a separate study that will be analyzed by an
independent, blinded panel of cardiologists, that is comparing echocardiograms
of patients who took Redux alone to echocardiograms of a control group of
patients who did not take any anti-obesity medication to measure the prevalence
and severity of abnormal cardiac valvular findings among the two sets of
patients. An estimated 300 patients will be included in each of the Redux and
control groups of the Company-supported study, the costs of which are estimated
at up to approximately $4,000,000. A number of other clinical studies relating
to the prevalence of abnormal echocardiogram findings in patients who took Redux
(and other anti-obesity agents) have been and may be conducted by Wyeth-Ayerst
and/or others.

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     On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of people
who took Pondimin or Redux. HHS recommended, until more complete information is
available, that patients who took either drug should see their physician to
determine whether there are signs or symptoms of heart or lung disease and if
such person has signs or symptoms of heart or lung disease, such as a new heart
murmur or shortness of breath, have an echocardiogram performed; and that
physicians strongly consider performing an echocardiogram before a patient who
has taken either drug has any invasive procedure for which antibiotic
prophylactic treatment is recommended to prevent the development of bacterial
endocarditis.

     Background; Regulatory Approval, Labeling and Safety Issues: Redux
(dexfenfluramine) is chemically related to Pondimin (fenfluramine). Fenfluramine
is a drug made up of two mirror- image halves - a "right-handed" half (d-isomer)
and "left-handed" half (l-isomer) - and dexfenfluramine is the right-handed
isomer of fenfluramine (the left-handed half is "levofenfluramine").
Dexfenfluramine alone is a separate drug from the combined
dexfenfluramine/levofenfluramine molecule that is fenfluramine. 

     Redux received clearance on April 29, 1996 by the FDA for marketing as a
twice-daily prescription therapy to treat obesity. The approved indication was
for the management of obesity, including weight loss and maintenance of weight
loss in patients on a reduced calorie diet who have a body mass index ("BMI") of
greater than or equal to 30 kg/m2 or greater than or equal to 27 kg/m2 in the
presence of other risk factors, such as hypertension, diabetes and elevated
cholesterol. Under license and copromotion agreements, Redux was marketed until
its withdrawal in the U.S. by Wyeth-Ayerst and copromoted by the Company.

     Marketing clearance of Redux by the FDA followed a second meeting of the
Endocrinologic and Metabolic Advisory Committee (the "Advisory Committee") of
the FDA on November 16, 1995 at which time the Advisory Committee recommended,
by a vote of 6 to 5, the approval of Redux to treat obesity. The Advisory
Committee also recommended, and the Company agreed, that Phase 4, or
post-marketing, studies be conducted and that certain labeling guidelines be
implemented. Included in the FDA-approved labeling for Redux were references to
certain risks that may be associated with dexfenfluramine and which were
highlighted during the FDA's review of the drug. One issue relates to whether
there is an association between appetite suppressants, including
dexfenfluramine, and the development of primary pulmonary hypertension ("PPH"),
a rare but serious lung disorder estimated to occur in the general population at
one to two cases per million adults per year. An epidemiologic study conducted
in Europe known as IPPHS (International Primary Pulmonary Hypertension Study)
examined risk factors for PPH and showed that among other factors, weight
reduction drugs, including dexfenfluramine, and obesity itself were associated
with a higher risk of PPH. In the final report of IPPHS, published in the New
England Journal of Medicine (August 29, 1996), the authors re-classified and
included certain previously excluded cases of PPH, resulting in an increase in
the estimated yearly occurrence of PPH for patients taking appetite suppressants
for greater than three months' duration to be between 23 and 46 cases per
million patients per year. The revised labeling for Redux disclosed this revised
estimate.

         The FDA-approved labeling for Redux also includes discussion as to
whether dexfenfluramine is associated with certain neurochemical changes in the
brain. Certain studies conducted by third parties related to this issue purport
to show that very high doses of


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dexfenfluramine cause prolonged serotonin depletion in certain animals, which
some researchers believe is an indication of neurotoxicity. The Company has
presented data relating to the lack of neurocognitive effects in patients taking
Redux to the FDA and believes that, as demonstrated in human trials, these
animal studies are clinically irrelevant to humans because of pharmacokinetic
differences between animals and humans and because of the high dosages used in
the animal studies. In connection with the approval of Redux, the Company and
Wyeth-Ayerst agreed with the FDA to conduct a Phase 4, or post marketing, study
of Redux. Following the withdrawal of Redux, this study was terminated.

         In July 1997, the Mayo Clinic reported observations of heart valve
abnormalities in 24 patients taking the combination of Pondimin and phentermine.
The Mayo Clinic cases were subsequently reported in an article appearing in the
August 28, 1997 issue of The New England Journal of Medicine. This article was
accompanied by a letter to the editor from the FDA reporting additional cases of
heart valve disease in 28 patients taking the combination of phentermine and
fenfluramine, two patients taking fenfluramine alone, four patients taking Redux
alone and two patients taking Redux and phentermine.

         Legal Actions: The Company has been named, together with other
pharmaceutical companies, as a defendant in approximately 200 legal actions,
many of which purport to be class actions, in federal and state courts relating
to the use of Redux. The actions generally have been brought by or on behalf of
putative classes of persons who claim to have suffered injury or who claim that
they may suffer injury in the future due to use of one or more weight loss drugs
including Pondimin (fenfluramine), phentermine and Redux. Plaintiffs'
allegations of liability are based on various theories of recovery, including,
but not limited to, product liability, strict liability, negligence, various
breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These
lawsuits typically allege that the short or long-term use of Pondimin and/or
Redux, independently or in combination (including the combination of Pondimin
and phentermine popularly known as "fen/phen"), causes, among other things,
primary pulmonary hypertension, valvular heart disease and/or neurological
dysfunction. In addition, some lawsuits allege emotional distress caused by the
purported increased risk of injury in the future. Plaintiffs typically seek
relief in the form of monetary damages (including economic losses, medical care
and monitoring expenses, loss of earnings and earnings capacity, other
compensatory damages and punitive damages), generally in unspecified amounts, on
behalf of the individual or the class. In addition, some actions seeking class
certification ask for certain types of purportedly equitable relief, including,
but not limited to, declaratory judgments and the establishment of a research
program or medical surveillance fund. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings.

                  The Company and certain directors and/or officers of the
Company have also been named as defendants in several lawsuits filed by alleged
purchasers of the Company's Common Stock, purporting to be class actions,
claiming among other things that the Company publicly disseminated materially
false and misleading statements concerning the prospects and safety of Redux,
resulting in the artificial inflation of the Company's Common Stock price during
various periods, the earliest commencing December 16, 1996 through September 17,
1997, in violation of the federal securities laws.

                  Under certain circumstances, the Company is required to
indemnify Servier, Boehringer Ingelheim Pharmaceuticals, Inc. (the contract
manufacturer of Redux capsules) and


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<PAGE>

AHP, and the Company is entitled to indemnification by AHP against certain
claims, damages or liabilities incurred in connection with Redux. The cross
indemnification between the Company and AHP generally relates to the activities
and responsibilities of each company. Although the Company maintains certain
product liability and director and officer liability insurance and intends to
defend these and similar actions vigorously, the Company may be required to
devote significant management time and resources to these actions and, in the
event of successful uninsured or insufficiently insured claims, or in the event
a successful indemnification claim was made against the Company, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the uncertainties associated with these legal
actions have had, and may continue to have, an adverse effect on the market
price of the Company's common stock, and may impair the Company's ability to
obtain additional financing to satisfy cash requirements, to retain and attract
qualified personnel, to commercialize products on a timely and adequate basis
and to acquire or license additional products, any or all of which may
materially adversely affect the Company's business.

         Redux Revenues; Charges to Operations: A significant portion of
Interneuron's revenues had been derived from Redux sales and the Company does
not expect to realize any significant future revenues related to Redux. In
connection with the withdrawal of Redux, the Company incurred charges to
operations in the fourth quarter and fiscal year ended September 30, 1997,
aggregating approximately $10,800,000. Of this amount (i) approximately
$3,300,000 (included in cost of revenues) related to reserves for inventories of
dexfenfluramine drug substance and finished Redux capsules which were deemed to
have no net realizable value and (ii) approximately $7,500,000 related to costs
or commitments associated with product development, litigation, cessation of
production of Redux capsules and other costs. Total expenses relating to the
market withdrawal of Redux may exceed these amounts which are based on current
estimates and do not include provisions for liability, if any, arising out of
Redux-related litigation or other costs which are not currently determinable.

         Uncertainties Relating to CerAxon: The Company's future success is
substantially dependent on the timely approval and commercialization of CerAxon.
In December 1997, the Company submitted to the FDA an NDA for the use of CerAxon
to treat ischemic stroke. The FDA has 60 days after NDA submission to accept or
reject the NDA for filing and there can be no assurance the FDA will accept the
NDA for filing. The Company believes the three completed Phase 3 clinical
studies(two U.S. studies and one Japanese study), as well as supportive data,
show the safety and beneficial treatment effect of CerAxon in patients with
ischemic stroke, particularly those with moderate to severe strokes. The Company
is conducting additional Phase 3b clinical studies to study CerAxon's effect on
stroke recovery and reduction in infarct size. There can be no assurance the FDA
will grant authorization to commercialize CerAxon based on the studies submitted
with the NDA. A requirement for additional studies prior to approval could take
several years and would be expensive to complete and, accordingly, would delay
product launch and materially adversely affect the Company. The Ferrer Agreement
provides that Ferrer may terminate the Ferrer Agreement in the event FDA
approval of citicoline is not obtained by January 1999, which date shall be
extended if the Company provides information to Ferrer which tends to establish
that the Company has carried out the steps for obtaining such approval and if
such approval has not been obtained for reasons beyond the Company's control.
Assuming FDA approval, revenues generated by the Company from CerAxon will
depend to a significant extent on the FDA-approved label as well as the
availability of third-party reimbursement for the drug.



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                  The manufacturing facilities of Ferrer used to produce bulk
citicoline as well as the manufacturing facility of the finished product
supplier, are required to comply with all FDA requirements, including current
good manufacturing practice ("GMP") regulations, and are subject to FDA
inspection, both before and after NDA approval, to determine compliance with
those requirements. To date, Ferrer's manufacturing facility has not been
inspected by the FDA for a U.S. marketed product, but is expected to undergo
such an inspection in conjunction with the FDA's review of the CerAxon NDA
submitted by the Company. The GMP regulations are complex and failure to be in
compliance could lead to non-approval or delayed approval of the NDA, which
would delay product launch or, if such approval is obtained, the need for
remedial action, penalties and delays in production of material acceptable to
the FDA. There can be no assurance the manufacturing facilities for citicoline
have complied or will continue to comply with applicable requirements. Further,
although the supplies of citicoline finished product for clinical trials have
been obtained from a contract manufacturer, the Company has not formalized its
agreement with such manufacturer to provide for commercial manufacturing and
supply of citicoline finished product and there can be no assurance such
agreement can be obtained on terms favorable to the Company or at all, which
could adversely affect the Company's ability to commercialize CerAxon on a
timely or cost-effective basis.

         Assuming regulatory approval and sufficient available funds, the
Company currently intends to market CerAxon directly and, accordingly, will be
required to establish, maintain and manage sufficient sales and marketing
capabilities. Although the Company has a small sales force which had been
engaged in co-promotion of Redux and is promoting PMS Escape for InterNutria, it
has no experience in marketing any pharmaceutical products directly and there
can be no assurance that it will successfully market CerAxon.

         Further, the Company may require additional funds for the manufacturing
and marketing of CerAxon and, if such funds are not available, the Company may
be required to delay product launch, reduce launch and marketing efforts, or
enter into a corporate collaboration, any of which may result in the Company
generating less revenue and eventually, reduced profitability from CerAxon than
if the Company were able to launch the product on a timely basis and conduct
sole marketing. As a result of the uncertainties and costs associated with the
Redux-related litigation and other factors generally affecting the ability to
raise additional financing, there can be no assurance the Company will be able
to obtain additional financing to satisfy cash requirements or that if
available, such financing will be on terms favorable to the Company or that the
Company will be able to recruit and retain required marketing, sales, medical
and administrative support personnel. See "Risks Associated with Redux
Withdrawal and Legal Proceedings".

         History of Losses; Accumulated Deficit and Potential Future Losses;
Charges to Operations; Fluctuations in Revenues: Through September 30, 1997, the
Company had accumulated net losses since inception of approximately $162
million. Substantially all of the Company's revenues from operations were
derived from Redux, which was withdrawn from the market in September 1997.
Losses are continuing and cash continues to be used by operating activities. The
Company will be required to conduct significant development and clinical testing
activities and establish marketing, sales, regulatory and administrative
capabilities for many of its products, including products under development or
which may be acquired in the future, which are expected to result in continued
operating losses for the foreseeable future. The extent of future losses and
time required to achieve profitability are highly uncertain. The Company
incurred charges to operations in the fiscal quarter and year ended September
30, 1997 relating to the acquisition of Mercator by Progenitor, of approximately
$7,800,000, and relating to the withdrawal


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<PAGE>
of Redux, aggregating approximately $10,800,000. In addition, the Company will
incur charges to operations in connection with the proposed acquisition by
Intercardia of Transcell, currently estimated to range from approximately
$6,000,000 to $8,000,000 by Intercardia, during the period in which the closing
occurs and future charges relating to certain option grants in connection with
the acquisition. The Company will allocate a portion of such charges to minority
interest. In addition, the Company will incur compensation expense over the
vesting periods of the 1,328,704 shares of Common Stock subject to outstanding
Restricted Stock Awards. These charges are expected to aggregate approximately
$15,500,000, of which approximately $11,000,000 is expected to be incurred in
the fiscal year ending September 30, 1998 and the remainder through fiscal 2000.
There can be no assurance that the Company will be able to achieve profitability
on a sustained basis, if at all. The Company has experienced, and may continue
to experience, fluctuations in revenues as a result of the Redux withdrawal,
regulatory approvals, product launches, the timing of license fees, royalties,
product shipments, and milestone payments.

                  Uncertainties Generally Related to Clinical Trials: Before
obtaining regulatory approval for the commercial sale of any of its
pharmaceutical products under development, the Company must demonstrate that the
product is safe and efficacious for use in each target indication. The results
of preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing or use, and there can be no
assurance that clinical trials of the products under development by the Company
will demonstrate the safety and efficacy of such products or that, regardless of
clinical trial results, FDA approval will be obtained. A number of companies in
the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials or have not received FDA approval, even after promising results
in earlier trials. If clinical trials do not demonstrate the safety and efficacy
of certain products under development, the Company may be adversely affected. An
NDA has been submitted for CerAxon and Phase 3b clinical trials on
CerAxon are ongoing. Bextra is currently in a Phase 3 clinical trial and
pagoclone is undergoing a Phase 2/3 clinical trial. The Company also expects to
conduct clinical trials on additional products, including those that may be
acquired in the future. There can be no assurance that any of these trials will
confirm or demonstrate the safety and efficacy of the respective drug. The rate
of completion of any clinical trial is dependent upon, among other factors, the
rate of patient enrollment, which is a function of, among other things, the size
of the patient population, the nature of the protocol, the proximity of patients
to clinical sites, the eligibility criteria for the study and the alternative
drug therapies, if any, available. The Company also expects to conduct clinical
evaluation on certain dietary supplement products to substantiate the claims
that are expected to be made for the products. There can be no assurance that
these clinical evaluations will be successful.

                  Risk of Product Liability: In addition to the claims and risks
summarized under "Risks Relating to Withdrawal of Redux and Legal Proceedings",
the use of the Company's other products in clinical trials and the marketing of
any products may expose the Company to substantial product liability claims.
Certain of the Company's agreements require the Company to obtain specified
levels of insurance coverage, naming the other party thereto as an additional
insured. There can be no assurance that the Company will continue to be able to
maintain or obtain such insurance coverage, that such insurance can be acquired
in sufficient amounts to protect the Company or other named parties against such
liability, at a reasonable cost, or at all or that any insurance obtained will
cover any particular liability claim. The Company is unable to predict the
extent to which the Redux-related litigation may affect its ability to obtain
sufficient product liability insurance for other products at costs acceptable to
the Company. The Company may also be required to indemnify licensors or
licensees against product liability claims incurred by them as a result of
products developed or marketed by the Company. In the event of uninsured or
insufficiently insured product liability claims, or in the event a successful
indemnification claim was made


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<PAGE>

against the Company, the Company's business and financial condition could be
materially adversely affected. There can be no assurance that the Company will
continue to be able to obtain adequate insurance in the future, at an acceptable
cost or at all.

                  Funding Requirements: The Company has expended and will
continue to expend substantial funds for product development activities
including preclinical and clinical testing on products under development,
including products which may be acquired in the future. In addition, the Company
intends to market directly and to establish sales and marketing capabilities for
CerAxon assuming applicable regulatory approvals are obtained. The Company may
require additional funds for the manufacturing and marketing of CerAxon and, if
such funds are not available, the Company may be required to delay product
launch, reduce launch and marketing efforts, or enter into a corporate
collaboration, any of which may result in the Company generating less revenue
and eventually, reduced profitability from CerAxon than if the Company were able
to launch the product on a timely basis and conduct sole marketing.

                  Although the Company believes it has sufficient cash resources
to meet its requirements through fiscal 1998, it will be required to seek
additional funds after such time and may seek additional funds prior to such
time through corporate collaborations or future equity or debt financings. The
Company's financing requirements will depend on many factors including the
timing of the FDA review process for CerAxon and, if approved, the timing and
extent of CerAxon launch and marketing activities conducted by the Company, the
timing and costs associated with the Redux-related litigation, the nature and
extent of additional clinical trials conducted by the Company, whether the
Company acquires and seeks to develop new products and the extent to which cash
or securities are used by the Company as consideration for any of the foregoing.
To the extent that the Company issues securities, dilution to existing
shareholders will result. As a result of the uncertainties and costs associated
with the Redux-related litigation and other factors generally affecting the
ability to raise additional funds, there can be no assurance the Company will be
able to obtain additional financing to satisfy cash requirements or that if
available, any financing will be on terms favorable to the Company or that the
Company will be able to recruit and retain required marketing, sales, medical
and administrative support personnel. See "Risks Associated with Redux
Withdrawal and Legal Proceedings".

                  The Company is also marketing PMS Escape through InterNutria
and intends to market directly or co- promote sports supplement products and
Melzone. Although the Company is devoting significant funding to the national
marketing of PMS Escape, it anticipates that such product will not generate
substantial revenues or be profitable to the Company during fiscal 1998.
Interneuron is also currently funding the activities of Transcell and although
Intercardia, Interneuron and Transcell have entered into a letter of intent
relating to the potential sale of Transcell to Intercardia, there is no
assurance this acquisition will be completed. Although Interneuron may acquire
additional equity in a subsidiary through participation in any such financing or
conversion of intercompany debt, equity financings by a subsidiary will likely
reduce Interneuron's percentage ownership of that subsidiary and funds held by
the Subsidiaries will not be available to Interneuron. Although certain of the
Subsidiaries are engaged in discussions relating to potential business
combinations or private or public equity financings, except as set forth or
incorporated by reference herein, none of the Subsidiaries has any commitments
for additional financing and there can be no assurance that any such financing
will be available on acceptable terms, if at all. If adequate funds are not
available to these subsidiaries on acceptable terms, such subsidiaries may be
required to delay, scale back or eliminate some or all of their respective
research and product development programs or product launches.



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                  Risks Relating to Managing Growth: Assuming additional
proposed product launches occur, the Company anticipates experiencing a period
of rapid growth, which is likely to place significant demands on the Company's
management, operational, financial and accounting resources. The Company's
intention to market certain products directly, particularly CerAxon, will
further strain these resources. In particular, the Company will be required to
establish and maintain a marketing organization, including a sales force and
related management systems. The Company's future success will depend in part on
whether it can expand its operational, financial and accounting systems and
expand, train and manage its employee base. The Company's inability to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

                  Risks Relating to Contractual Arrangements: The Company's
agreements with licensors and licensees generally provide the other party with
rights to terminate the agreement, in whole or in part, under certain
circumstances. For example, under the Ferrer Agreement, Ferrer has the right to
terminate the Ferrer Agreement in the event FDA approval of citicoline is not
obtained by January 1999, which date shall be extended if the Company provides
information to Ferrer which tends to establish that the Company has carried out
the steps for obtaining such approval and if such approval has not been obtained
for reasons beyond the Company's control, or in the event an unaffiliated party
acquires 50% of Interneuron's Common Stock. Servier has the right to terminate
the agreements relating to the licensing of Redux to the Company under certain
conditions including an acquisition by a new party of a 20% beneficial ownership
interest in the Company without Servier's consent or certain Company activities
relating to the marketing of certain competitive products, subject to specified
terms and conditions. Termination of certain of these agreements could
substantially reduce the likelihood of successful commercialization of a
particular product which, depending upon the importance to the Company of the
product that is subject to any such agreement, could materially adversely affect
the Company's business.

                  Uncertainty of Government Regulation: The Company's research,
development and pre-clinical and clinical trials and the manufacturing and
marketing of most of its products are subject to an extensive regulatory
approval process by the FDA and other regulatory agencies in the U.S. and other
countries. The process of obtaining FDA and other required regulatory approvals
for drug and biologic products, including required preclinical and clinical
testing, is lengthy, expensive and uncertain. There can be no assurance that,
even after such time and expenditures, the Company will be able to obtain
necessary regulatory approvals for clinical testing or for the manufacturing or
marketing of any products. In December 1997, the Company submitted to the FDA an
NDA for the use of CerAxon to treat ischemic stroke. The FDA has 60 days after
NDA submission to accept or reject the NDA for filing and there can be no
assurance the FDA will accept the NDA for filing. Regulatory approval may entail
limitations on the indicated usage of a drug, which may reduce the drug's market
potential. Even if regulatory clearance is obtained, post-market evaluation of
the products, if required, could result in restrictions on a product's marketing
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. In addition, the Company will be dependent upon the
manufacturers of its products to maintain compliance with GMP and on
laboratories and medical institutions conducting preclinical studies and
clinical trials to maintain both good laboratory and good clinical practices.
There can be no assurance that GMP manufacturers capable of producing product
according to forecasts can be obtained on a timely basis, or at all, for
products under development, including CerAxon and pagoclone, which would
materially adversely affect the Company's ability to commercialize these
products. Certain products are or are proposed to be marketed by the Company as
dietary supplements, such as PMS Escape, the sports supplement products and
Melzone. There can be no assurance that the FDA will not attempt to regulate the
products as drugs, which would require the filing of NDAs and review


                                       75

<PAGE>

and approval by the FDA prior to marketing, or otherwise restrict the marketing
of these products. In addition, classification of these products as dietary
supplements limits the types of claims that can be made in marketing. The
Federal Trade Commission has overlapping jurisdiction with the FDA to regulate
the promotion and advertising of dietary supplements and other special
nutritional products, including those of InterNutria.

                  In addition to the regulatory framework for product approvals,
the Company and its collaborative partners may be subject to regulation under
state and federal laws, including requirements regarding occupational safety,
laboratory practices, environmental protection and hazardous substance control,
and may be subject to other present and possible future local, state, federal
and foreign regulation. The impact of such regulation upon the Company cannot be
predicted and could be material and adverse.

                  Uncertainty of Patent Position and Proprietary Rights: The
Company's success will depend to a significant extent on its ability to obtain
and enforce patent protection on its products and technologies, to maintain
trade secrets and to operate without infringing on the proprietary rights of
others. There can be no assurance that any Company patents will afford any
competitive advantages or will not be challenged or circumvented by third
parties or that any pending patent applications will result in patents being
issued. Certain of the Company's patents and patent applications include
biotechnology claims, the patentability of which generally is highly uncertain
and involves complex legal and factual questions. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that before a potential product can be commercialized, any
related patent may expire, or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent.

                  The U.S. composition of matter patent on bucindolol expired in
November 1997. As a result, assuming FDA approval can be obtained, competitors,
including generic drug manufacturers, may market bucindolol, subject to
potential market exclusivity under the Waxman- Hatch Act. The Company's licensed
U.S. patent covering the administration of citicoline to treat patients
afflicted with conditions associated with the inadequate release of brain
acetylcholine expires in 2003, subject to potential extension under the
Waxman-Hatch Act. As described in the licensed patent, the inadequate release of
acetylcholine may be associated with several disorders, including the behavioral
and neurological syndromes seen after brain traumas and peripheral neuro-
muscular disorders, and post-stroke rehabilitation. Although the claim of the
licensed patent is broadly directed to the treatment of inadequate release of
brain acetylcholine, there can be no assurance this patent will afford
protection against competitors of CerAxon to treat ischemic stroke. The Company
has received a notice of allowance of claims pending in a patent application for
the use of citicoline to reduce the size of the area damaged by the stroke, or
infarct size.

                  The Company may conduct research on pharmaceutical or chemical
compounds or technologies, the patents or other rights to which may be held by
third parties. Others have filed and in the future may file patent applications
covering certain products or technologies that are similar to those of the
Company. If products based on such technologies are commercialized by the
Company, they may be found to infringe such patents or other rights, licenses to
which may not be available to the Company. Failure to obtain needed patents,
licenses or proprietary information held by others may have a material adverse
effect on the Company's business. There can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company or, if patents are issued, successfully design around the
patented aspects of any technology developed by the Company. Furthermore,
litigation may be


                                       76

<PAGE>

necessary to enforce any patents issued to the Company, to determine the scope
and validity of the patent rights of others or in response to legal action
against the Company claiming damages for infringement of patent rights or other
proprietary rights or seeking to enjoin commercial activities relating to the
affected product or process. Not only is the outcome of any such litigation
highly uncertain, but such litigation may also result in significant use of
management and financial resources.

                  To the extent that consultants, key employees or other third
parties apply technological information independently developed by them or by
others to the Company's proposed products, disputes may arise as to the
proprietary rights to such information which may not be resolved in favor of the
Company. Most of the Company's consultants are employed by or have consulting
agreements with third parties and any inventions discovered by such individuals
generally will not become property of the Company. There can be no assurance
that Company confidentiality agreements will not be breached or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors.

                  Competition: Competition from other pharmaceutical companies,
biotechnology companies, dietary supplement companies and research and academic
institutions is intense and expected to increase. The Company is aware of
products and technologies under development by its competitors that address
diseases being targeted by the Company and competitors have developed or are in
the process of developing products or technologies that are, or in the future
may be, the basis for competitive products. Activase, a thrombolytic agent, is
marketed by Genentech, Inc. as a treatment for stroke. To the Company's
knowledge, Janssen Pharmaceutical NV filed an NDA for a stroke treatment known
as Prosynap (lubeluzole) although an FDA advisory committee hearing scheduled to
review the drug was recently cancelled. A number of other products are in
clinical development pursuing an indication for stroke which could also compete
with CerAxon. In addition, if regulatory approval is obtained, Bextra will
compete with Coreg (carvedilol), which has been approved and is marketed in the
U.S. by SmithKline Beecham for the treatment of congestive heart failure. In
addition, Melzone will compete with a substantial number of available melatonin
dietary supplement products and PMS Escape competes with a number of products
for use by women during the pre-menstrual period.

                  Uncertainty Regarding Pharmaceutical Pricing and
Reimbursement: The Company's business will be affected by the efforts of
governmental and third-party payors to contain or reduce the cost of health
care. There have been, and the Company anticipates that there will continue to
be, a number of proposals to implement government control over the pricing or
profitability of prescription pharmaceuticals, as is currently the case in many
foreign markets. The announcement or adoption of such proposals could have an
adverse effect on the Company. Furthermore, the Company's ability to
commercialize its products may be adversely affected to the extent that such
proposals have a material adverse effect on the business, financial condition
and profitability of companies that are prospective collaborative partners of
the Company. Successful commercialization of many of the Company's products may
depend on the availability of reimbursement for the cost of such products and
related treatment from third-party health care payors, such as the government,
private insurance plans and managed care organizations. Such third-party payors
are increasingly challenging the price of medical products and services. There
can be no assurance that such reimbursement will be available for any of the
Company's products at all or for the duration of the recommended treatment with
the drug, which could materially adversely affect the Company's ability to
commercialize such drug. The increasing emphasis on managed care in the U.S. has
and will continue to increase the pressure on pharmaceutical pricing.

                  Uncertainty Regarding Waxman-Hatch Act: Certain provisions of
the Waxman- Hatch Act grant market exclusivity for certain new drugs and dosage
forms. The Waxman-Hatch Act provides that a patent which claims a product, use
or method of manufacture covering certain drugs and certain other products may
be extended for up to five years to compensate the patent holder for a portion
of the time required for research and FDA review of the product. The
Waxman-Hatch Act also establishes a period of time from the date of FDA approval
of certain new drug applications during which the FDA may not accept or approve
short-form applications for generic versions of the drug from other sponsors,
although it may accept or approve long-form applications (that is, other
complete NDAs) for such drug. There can be no assurance the Company will receive
marketing exclusivity for any product. The composition of matter patent for
bucindolol expired in November 1997. The Company's licensed patent relating to
citicoline expires in 2003 and there can be no assurance that patent term
extension under the Waxman-Hatch Act will be obtained. There can be no assurance
that any of the benefits of the Waxman-Hatch Act or similar foreign laws will be
available to the Company or that such laws will not be amended or repealed.

                  Early Stage of Products Under Development by the Company: The
Company is investigating for therapeutic potential a variety of pharmaceutical
compounds, technologies and

 
                                       77

<PAGE>

other products at various stages of development. In particular, Progenitor and
Transcell each are conducting very early stage research and all of their
proposed products require significant further research and development, as well
as testing and regulatory clearances, and are subject to the risks of failure
inherent in the development of products or therapeutic procedures based on
innovative technologies. The products under development by the Company are
subject to the risk that any or all of these proposed products are found to be
ineffective or unsafe, or otherwise fail to receive necessary regulatory
clearances. The Company is unable to predict whether any of its products will be
successfully manufactured or marketed. Further, due to the extended testing and
regulatory review process required before marketing clearance can be obtained,
the time frames for commercialization of any products or procedures are long and
uncertain.

                  Dependence on Others for Clinical Development, Regulatory
Approvals, Manufacturing and Marketing: The Company expects to rely upon
collaborative partners for the development, manufacturing and marketing of
certain of its products, including products which may be acquired in the future.
The Company is therefore dependent on the efforts of these collaborative
partners and the Company may have limited control over the manufacture and
commercialization of such products. For example, with respect to Bextra, neither
the Company nor Intercardia controls the BEST Study, which is being conducted by
the NIH and the VA, and the Company will be substantially dependent upon Astra
Merck for the commercial success of the twice-daily formulation of bucindolol in
the U.S., assuming FDA approval is obtained. In the event certain of the
Company's collaborative partners terminate the related agreements or fail to
manufacture or commercialize products, the Company would be materially adversely
affected. Because the Company will generally retain a royalty interest in sales
of products licensed to third parties, its revenues may be less than if it
retained commercialization rights and marketed products directly. Although the
Company believes that its collaborative partners will have an economic
motivation to commercialize the products that they may license, the amount and
timing of resources devoted to these activities generally will be controlled by
each partner. There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, or that any such
collaborative partners will be successful in commercializing products or not
terminate their collaborative agreements with the Company.

                  Many companies in the pharmaceutical and dietary supplement
industries have substantially greater financial resources and development
capabilities than the Company and have substantially greater experience in
undertaking preclinical and clinical testing of products, obtaining regulatory
approvals and manufacturing and marketing products. In addition to competing
with universities and other research institutions in the development of
products, technologies and processes, the Company may compete with other
companies in acquiring rights to products or technologies. There can be no
assurance that the Company will develop products that are more effective or
achieve greater market acceptance than competitive products, or that the
Company's competitors will not succeed in developing products and technologies
that are safer or more effective or less expensive than those being developed by
the Company or that would render the Company's products and technologies less
competitive or obsolete.

                  Dependence Upon Key Personnel and Consultants: The Company is
dependent on certain executive officers and scientific personnel and the
Company's business would be adversely affected by the loss of certain of these
individuals. The Company has key person life insurance policies on the lives of
Glenn L. Cooper, M.D., Richard Wurtman, M.D. and Lindsay A. Rosenwald, M.D. Drs.
Wurtman and Rosenwald devote only a portion of their time to the Company's
business. In addition, the Company is dependent upon certain executive officers
of the

                                       78

<PAGE>

Subsidiaries, each of which has separate management who are responsible, to a
large extent, for the day-to-day operations and the strategic direction of the
respective subsidiary. In addition, the Company relies on independent
consultants to design and supervise clinical trials and assist in preparation of
FDA submissions.

                  Competition for qualified employees among pharmaceutical and
biotechnology companies is intense, and the loss of any of such persons, or an
inability to attract, retain and motivate highly skilled employees, could
adversely affect the Company's business and prospects. The uncertainties
associates with the ongoing Redux-related litigation may adversely affect the
Company's ability to retain and recruit qualified personnel. The Company will be
required to hire significant numbers of marketing and sales personnel, as well
as medical and administrative support personnel, in connection with a launch of
CerAxon. There can be no assurance that the Company will be able to retain its
existing personnel or to attract additional qualified employees.

                  Control by Present Stockholders; Anti-Takeover Provisions: The
executive officers, directors and principal stockholders of the Company
(including individuals or entities related to such stockholders) beneficially
own approximately 47% of the Company's Common Stock. Accordingly, these
officers, directors and stockholders may have the ability to exert significant
influence over the election of the Company's Board of Directors and to determine
corporate actions requiring stockholder approval.

                  The Board of Directors has the authority, without further
approval of the Company's stockholders, to fix the rights and preferences of and
to issue shares of preferred stock. In addition, Ferrer may terminate the Ferrer
Agreement in the event an unaffiliated third party acquires 50% of Interneuron's
Common Stock. The preferred stock held by AHP provides that AHP's consent is
required prior to the merger of the Company, the sale of substantially all of
the Company's assets or certain other transactions. In addition, vesting of
shares of Common Stock subject to Restricted Stock Awards under the Company's
1997 Equity Incentive Plan (the "1997 Plan") accelerates and outstanding options
under the Company's stock option plans become immediately exercisable upon
certain changes in control of the Company, except under certain conditions. In
addition, Delaware corporate law imposes limitations on certain business
combinations. These provisions could, under


                                       79

<PAGE>

certain circumstances, have the effect of delaying or preventing a change in
control of the Company and, accordingly, could adversely affect the price of the
Company's Common Stock.

                  No Dividends: The Company has not paid any cash dividends on
its Common Stock since inception and does not expect to do so in the foreseeable
future. Any dividends will be subject to the preferential cumulative dividend of
$0.1253 per share and $1.00 per share payable on the outstanding Series B
Preferred Stock and Series C Preferred Stock, respectively, held by AHP and
dividends payable on any other preferred stock issued by the Company.

                  Possible Volatility of Stock Price: The market prices for
securities of emerging growth companies have historically been highly volatile.
Future announcements concerning the Company or its subsidiaries, including
Intercardia and Progenitor, which are publicly traded, or the Company's
competitors, including the initiation and results of litigation, clinical
studies, regulatory filings or developments, technological innovations or
competitive products, proprietary rights, the Company's results of operations or
public concern as to the safety or commercial value of the Company's products,
may have a significant impact on the market price of the Company's Common Stock.
The initiation of and uncertainties associates with Redux-related litigation
have adversely affected and may continue to adversely affect the market price of
the Company's Common Stock.

                  Shares Eligible for Future Sale; Registration Rights: As of
December 22, 1997, 41,170,810 shares of Common Stock were outstanding, excluding
treasury shares. Substantially all of these shares are eligible for sale without
restriction or under Rule 144. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are aggregated), including persons who
may be deemed to be "affiliates" of the Company as that term is defined under
the Act, is entitled to sell within any three-month period a number of
restricted shares beneficially owned for at least one year that does not exceed
the greater of (i) one percent of the then outstanding shares of Common Stock,
or (ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person who is not an
affiliate and has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume or other requirements.

                  AHP has demand and piggy-back registration rights relating to
622,222 shares of Common Stock issuable upon conversion of preferred stock.
Certain stockholders entitled to receive additional shares of Common Stock in
December 1997 with a market value of $1,200,000 at the time of issuance have
registration rights in January 1998 relating to the resale of those shares. In
the event up to a maximum of approximately 232,000 shares of Common Stock are
issued in June 1998 pursuant to certain put protection rights, holders of such
shares will have registration rights at that time. SBC has registration rights
relating to 2,000,000 shares of Common Stock subject to options held by SBC to
purchase such shares in December 1999.

                  The Company has outstanding registration statements on Form
S-3 relating to the resale of shares of Common Stock and on Form S-8 relating to
its 1989 Stock Option Plan, 1994 Long-Term Incentive Plan, its 1995 Stock
Purchase Plan and the 1997 Plan.

                  All of the shares of Common Stock issuable under the 1997 Plan
can be sold by the recipient thereof immediately upon vesting of the Shares. Of
the 1,328,704 shares of Common Stock issuable under the 1997 Plan pursuant to
outstanding Restricted Stock Awards, 377,901 vest in January 1998, 112,334 vest
in May 1998, 76,834 vest in December 1999 and the remainder vest in the same
amounts and during the same months from January 1998 through May 2000, subject
to extension of each vesting date if it occurs during a "Black Out Period,"
generally meaning a

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<PAGE>

period in which the recipient is unable to sell the shares subject to the award
at the applicable vesting date due to legal or contractual restrictions. The
vesting dates are also subject to acceleration under certain circumstances,
including certain changes in control of the Company, except under certain
conditions. Sales of the shares of Common Stock subject to Restricted Stock
Awards or the possibility of sales of such shares may adversely affect the
market price of the Company's Common Stock.

                  Outstanding Options and Warrants. As of December 22, 1997,
approximately 7,884,000 shares of Common Stock were issuable upon exercise of
outstanding options and warrants, subject to anti-dilution provisions. As a
result of such provisions, issuance of shares of Common Stock pursuant to
Restricted Stock Awards may result in additional shares of Common Stock being
issuable upon exercise of certain warrants. In addition, the Company is required
to issue additional shares of Common Stock in connection with technology
acquisitions and may issue additional shares if certain put protection rights
and call options are exercised. To the extent such shares are issued, the
interest of holders of Common Stock will be diluted.

<TABLE>
<CAPTION>
PART IV

<S>      <C>
Item 14.  Exhibits, Financial Statements Schedules and Reports on Form 8-K

(a)   1.  Financial Statements

          An index to Consolidated Financial Statements appears on page F-1.

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>      <C>              <C>   

      2.  Schedules

          All financial statement schedules are omitted because they are not
          applicable, not required under the instructions or all the information
          required is set forth in the financial statements or notes thereto.

(b)       Reports on Form 8-K

          During the three month period ended September 30, 1997, the Registrant
          filed reports on Form 8-K reporting information under "Item 5 - Other
          Information" on July 3, 1997, July 18, 1997, July 25, 1997, August 29,
          1997, September 15, 1997 and September 18, 1997.

(c)       Exhibits

          3.4         -    Restated Certificate of Incorporation of Registrant, as amended (41)
          3.5         -    By-Laws of Registrant (1)
          4.4         -    Certificate of Designation establishing Series C Preferred Stock(17)
          4.6         -    Form of Registrant Warrant issued in subsidiary private
                           placement (25)
          4.7              - Form of Registrant Warrant issued to designees of
                           Paramount Capital, Inc., and D.H. Blair & Co.,
                           Inc.(25)
          4.8         -    1997 Equity Incentive Plan and Form of Restricted Stock Award Agreement
                           thereunder (44)
          10.5 (a)    -    Consultant and Non-competition Agreement between the
                           Registrant, Richard Wurtman, M.D. (34)
          10.5 (b)    -    Consultant and Non-competition Agreement between InterNutria,
                           Inc. and Judith Wurtman, Ph.D. (34)
          10.6             - Assignment of Invention and Agreement between
                           Richard Wurtman, M.D., Judith Wurtman and the
                           Registrant (1)
          10.7        -    Management Agreement between the Registrant
</TABLE>

                                       81

<PAGE>

<TABLE>
<CAPTION>
         <S>               <C>
                           and Lindsay Rosenwald, M.D. (1)
          10.9(a)     -    Restated and Amended 1989 Stock Option Plan  (7)
          10.10       -    Form of Indemnification Agreement (1)
          10.11       -    Restated Amendment to MIT Option Agreement (1)
          10.12(a)    -    Patent and Know-How License Agreement between the
                           Registrant and Les Laboratoires Servier ("Servier") dated February 7,
                           1990 ("License Agreement") (1)
          10.12(b)    -    Revised Appendix A to License Agreement (1) 
          10.12(c)    -    Amendment Agreement between Registrant and Servier, Orsem and
                           Oril, Produits Chimiques dated November 19,1992(3)(12) 
          10.12(d)    -    Amendment Agreement dated April 28, 1993 between Registrant and
                           Servier (16)
          10.12(e)    -    Consent and Amendment Agreement among Servier, American Home
                           Products Corp. and Registrant (34)
          10.13       -    Trademark License Agreement between the  Registrant and Orsem
                           dated February 7, 1990 (1)
          10.14       -    Supply Agreement between the Registrant and Oril Products
                           Chimiques dated February 7, 1990 (1)(3)
          10.15(a)    -    Form of Indemnification Agreement between the Registrant and
                           Alexander M. Haig, Jr.  (1)
          10.16       -    Assignment of Invention by Richard Wurtman, M.D. (1)
          10.22(a)    -    License Agreement dated January 15, 1993, as amended, between the
                           Registrant and Grupo Ferrer (3)(16)
          10.25       -    License Agreement between the Registrant and the Massachusetts
                           Institute of Technology (4)
          10.28       -    Letter Agreement between the Registrant and  Bobby W. Sandage, Jr.,
                           Ph.D. (7)
          10.30       -    License Agreement dated January 1, 1992 between the
                           Trustees of Princeton University and the Registrant
                           (3)(8)
          10.31       -    Research Agreement dated as of July 1, 1991 between
                           the Registrant and the Trustees of Princeton
                           University (3)(8)
          10.36       -    Exclusive License Agreement dated February 24, 1992 between the
                           Registrant and Purdue Research Foundation (9)
          10.37       -    License Agreement dated as of February 15, 1992
                           between the Registrant and Massachusetts Institute of
                           Technology (9)
</TABLE>


                                       82

<PAGE>

<TABLE>
<CAPTION>
         <S>              <C>                                                                           
          10.39       -    Employment Agreement between Transcell Technologies, Inc. and
                           Elizabeth Tallet dated November 11, 1992 and Guarantee  by
                           Registrant (13)
          10.40       -    Patent and Know-How Sublicense and Supply Agreement between
                           Registrant and American Cyanamid Company dated November 19,
                           1992 (3)(12)
          10.41       -    Equity Investment Agreement between Registrant and American
                           Cyanamid Company dated November 19, 1992 (12)
          10.42       -    Trademark License Agreement between Registrant and American
                           Cyanamid Company dated November 19, 1992 (12)
          10.43       -    Consent Agreement between Registrant and Servier dated November
                           19,1992 (12)
          10.45       -    Agreement between Registrant and Parexel International Corporation
                           dated October 22, 1992 (as of July 21, 1992) (3) (14)
          10.46            - License Agreement dated February 9, 1993 between
                           the Registrant and Massachusetts Institute of
                           Technology (3)(15)
          10.49       -    License Agreement between Registrant and Elan Corporation, plc
                           dated September 9, 1993 (3)(18)
          10.51       -    Letter Agreement between the Registrant and Mark Butler (18)
          10.52       -    License Agreement dated February 18, 1994 between Registrant and
                           Rhone-Poulenc Rorer, S.A. (20)
          10.54       -    Form of Purchase Agreement dated as of February 24, 1994 (20)
          10.54(a)    -    Form of Amendment to Purchase Agreement (20)
          10.55       -    Patent License Agreement between Registrant and Massachusetts
                           Institute of Technology dated March 1, 1994 (20)
          10.57       -    Employment Letter dated February 28, 1994 between the Registrant
                           and Thomas F. Farb (21)
          10.58       -    Master Equipment Lease including Schedules  and Exhibits between
                           Phoenix Leasing and Registrant (agreements for Transcell and
                           Progenitor are substantially identical), with form of continuing
                           guarantee for each of Transcell and Progenitor (22)
          10.59       -    Exhibit D to Agreement between Registrant and Parexel International
                           Corporation dated as of March 15, 1994 (3)(22)
          10.60(a)    -    Acquisition Agreement dated as of May 13, 1994 among the
                           Registrant, Intercardia, Inc., Cardiovascular Pharmacology Engineering
                           Consultants, Inc. (CPEC), Myocor, Inc. and the sellers named therein
                           (23)
          10.60(b)    -    Amendment dated June 15, 1994 to the Acquisition Agreement (23) 
          10.61       -    License Agreement dated December 6, 1991 between Bristol-Myers
                           Squibb and CPEC, as amended (3)(23)
          10.61(a)    -    Letter Agreement dated November 18, 1994 between CPEC and
                           Bristol-Myers Squibb (25)
          10.63       -    Form of Stock Purchase Agreement dated December 15, 1994 (25)
          10.64       -    Form of Investor Rights Agreement among Progenitor, Transcell,
                           Registrant and each investor in the subsidiary private placement (25) 
          10.64(a)    -    Form of Investor Rights Agreement among Intercardia, the Registrant
                           and each investor in the Intercardia private placement (25)
          10.65(a)    -    1994 Long-Term Incentive Plan, as amended (42)
</TABLE>


                                                     83

<PAGE>

<TABLE>
<CAPTION>
         <S>              <C>                                                                            
          10.67       -    Employment Agreement between Intercardia and Clayton I. Duncan
                           with Registrant guarantee (25)
          10.67(a)    -    Amendment to Employment Agreement between Intercardia, Inc. and
                           Clayton I. Duncan (36)
          10.68(a)    -    Interneuron Pharmaceuticals, Inc. 1995 Employee Stock Purchase Plan,
                           as amended (36)
          10.69       -    Office Lease, dated April 24, 1995 between Intercardia, Inc. and
                           Highwoods/Forsyth Limited Partnership, with Registrant Guaranty (27)
          10.70 (a)   -    License and Collaboration Agreement by and between Progenitor, Inc.,
                           and Chiron Corporation dated March 31, 1995 (3) (30)
          10.71       -    Securities Purchase Agreement dated June 2, 1995 between the
                           Registrant and Reliance  Insurance Company, including Warrant and
                           exhibits (29)
          10.72       -    Sponsored Research and License Agreement dated as of May 1, 1995
                           between Progenitor and Novo Nordisk (3) (30)
          10.73       -    Form of Stock Purchase Agreement dated as of June 28, 1995 (31)
          10.74       -    Securities Purchase Agreement dated as of August 16, 1995 between
                           the Registrant and BT Holdings (New York), Inc.,
                           including Warrant issued to Momint (nominee of BT
                           Holdings) (32)
          10.75       -    Stock Purchase Agreement dated as of August 23, 1995 between the
                           Registrant and Paresco, Inc. (32)
          10.76            - Stock Purchase Agreement dated as of September 15,
                           1995 between the Registrant and Silverton
                           International Fund Limited (32)
          10.77       -    Subscription Agreement dated September 21, 1995, as of August 31,
                           1995, including Registration Rights Agreement between Registrant and
                           GFL Advantage Fund Limited. (32)
          10.78       -    Contract Manufacturing Agreement dated November 20, 1995 between
                           Registrant and Boehringer Ingelheim Pharmaceuticals, Inc. (3) (34)
          10.79       -    Development and Marketing Collaboration and License Agreement
                           between Astra Merck, Inc., Intercardia, Inc. and CPEC, Inc., dated
                           December 4, 1995. (3) (33)
          10.80       -    Intercompany Services Agreement between Registrant and Intercardia,
                           Inc. (33)
          10.81       -    Asset Purchase Agreement dated November 14, 1995 among Registrant,
                           InterNutria, Inc., and Walden Laboratories, Inc. (34)
          10.82       -    Employment Agreement between Registrant and Glenn L. Cooper,  M.D.
                           dated April 30, 1996 effective as of May 13, 1996 (37)
          10.83       -    Co-promotion Agreement effective June 1, 1996 between Wyeth-Ayerst
                           Laboratories and Interneuron Pharmaceuticals, Inc. (3)(38)
          10.84       -    Master Consulting Agreement between Interneuron Pharmaceuticals, Inc.
                           and Quintiles, Inc. dated July 12, 1996 (38)
          10.85       -    Amendment No. 1 dated July 3, 1996 to Master Consulting Agreement
                           between Interneuron Pharmaceuticals, Inc. and Quintiles, Inc. dated
                           July 12, 1996 (3)(38)
          10.86       -    Lease Agreement between Transcell Technologies, Inc. and Cedar Brook
                           Corporate Center, L.P., dated September 19, 1996, with Registrant
                           guaranty (39)
          10.87       -    Lease dated February 5, 1997 between Registrant and Ledgemont Realty
                           Trust (40)
</TABLE>


                                       84

<PAGE>

<TABLE>
<CAPTION>
          <S>             <C>                                                                             
          10.89       -    Form of ISDA Master Agreement by and between the Registrant and
                           Swiss Bank Corporation, London Branch, together with Schedules
                           thereto (42)
          10.90(a)    -    Form of Confirmation for Contract A entered into pursuant to ISDA
                           Master Agreement by and between the Registrant and Swiss Bank
                           Corporation, London Branch, together with appendix thereto (42)
          10.90(b)    -    Form of Confirmation for Contract B entered into pursuant to ISDA
                           Master Agreement by and between the Registrant and Swiss Bank
                           Corporation, London Branch, together with appendix thereto (42)
          10.90(c)    -    Letter Amendment dated September 18, 1997 to Confirmations filed as Exhibits 10.90(a) and 10.90(b)
          10.91       -    Form of Agreement regarding Registration Rights and Related
                           Obligations to be entered into by and between Registrant and Swiss Bank
                           Corporation, London Branch (42)
          10.92       -    Research and Collaboration and License Agreement effective as of June
                           30, 1997 by and among Merck & Co., Inc., Transcell Technologies, Inc.
                           and the Registrant (3)(43)
          10.93       -    Form of Indemnification Agreement between Registrant and each
                           director, executive officer and certain officers of the Registrant entered
                           into as of October 6, 1997
          21          -    List of Subsidiaries (39)
          23          -    Consent of Coopers & Lybrand L.L.P.
          27          -    Financial Data Schedule
</TABLE>

---------------------------

<TABLE>
<CAPTION>
<S>       <C>                                                                           
(1)       Incorporated by reference to the Registrant's registration statement
          on Form S-1 (File No. 33-32408) declared effective on March 8, 1990.
(3)       Confidential Treatment requested for a portion of this Exhibit.
(4)       Incorporated by reference to the Registrant's Annual Report on Form
          10-K for the year ended September 30, 1990.
(7)       Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's
          registration statement on Form S-1 (File No. 33-32408) filed December 18, 1991.
(8)       Incorporated by reference to the Registrant's Quarterly Report on Form
          10-Q for the three months ended December 31, 1991.
(9)       Incorporated by reference to the Registrant's Quarterly Report on Form
          10-Q for the three months ended March 31, 1992.
(12)      Incorporated by reference to the Registrant's Form 8-K dated November 30, 1992.
(13)      Incorporated by reference to Post-Effective Amendment No. 5 to the Registrant's
          Registration Statement on Form S-1 (File No. 33-32408) filed on December 21, 1992.
(14)      Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal
          year ended September 30, 1992.
(15)      Incorporated by reference to the Registrant's Quarterly Report on Form
          10-Q for the three months ended December 31, 1992.
(16)      Incorporated by reference to the Registrant's Quarterly Report on Form
          10-Q for the six months ended March 31, 1993.
(17)      Incorporated by reference to the Registrant's Quarterly Report on Form
          10-Q for the nine months ended June 30, 1993.
(18)      Incorporated by reference to the Registrant's Annual Report on Form
          10-K for the fiscal year ended September 30, 1993.
</TABLE>



                                       85

<PAGE>

<TABLE>
<CAPTION>
<S>       <C>                                                                                       
(20)      Incorporated by reference to the Registrant's Registration Statement on Form S-3 or
          Amendment No. 1 (File no. 33-75826).
(21)      Incorporated by reference to the Registrant's Form 8-K dated March 31, 1994. 
(22)      Incorporated by reference to the Registrant's Quarterly Report on
          Form 10-Q for the six
          months ended March 31, 1994.
(23)      Incorporated by reference to the Registrant's Form 8-K dated June 20, 1994.
(25)      Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal
          year ended September 30, 1994.
(27)      Incorporated by reference to the Registrant's Quarterly Report on Form
          10-Q for the six months ended March 31, 1995.
(29)      Incorporated by reference to the Registrant's Quarterly Report on Form
          8-K dated June 2, 1995.
(30)      Incorporated by reference to the Registrant's Quarterly Report on Form
          8-K dated May 16, 1995; Exhibit 10.70 (a) supersedes Exhibit 10.70.
(31)      Incorporated by reference to Registrant's Quarterly Report on Form
          10-Q for the nine months ended June 30, 1995.
(32)      Incorporated by reference to Registrant's Report on Form 8-K dated August
          16, 1995. 
(33)      Incorporated by reference to Registration Statement filed on Form
          S-1 (No. 33-80219) by Intercardia, Inc. on December 8, 1995.
(34)      Incorporated by reference to Registrant's Annual Report on Form 10-K
          for the fiscal year ended September 30, 1995.
(36)      Incorporated by reference to Amendment No. 1 to Registrant's Registration Statement
          on Form S-3 (File No. 333-1273) filed March 15, 1996.
(37)      Incorporated by reference to Registrant's Registration Statement on
          Form S-3 (File No. 333-03131) filed May 3, 1996.
(38)      Incorporated by reference to Registrant's Quarterly Report on Form
          10-Q or 10-Q/A for the quarter ended June 30, 1996.
(39)      Incorporated by reference to Registrant's Annual Report on Form 10-K
          for the fiscal year ended September 30, 1996
(40)      Incorporated by reference to Registrant's Quarterly Report on Form
          10-Q for the three months ended December 31, 1996
(41)      Incorporated by reference to Exhibit 3.5 of Registrant's Quarterly
          Report on Form 10-Q for the three months ended March 31, 1997
(42)      Incorporated by reference to Registrant's Quarterly Report on Form
          10-Q for the three months ended March 31, 1997
(43)      Incorporated by reference to Registrant's Quarterly Report on Form
          10-Q for the three months ended June 30, 1997
(44)      Incorporated by reference to Registrant's Form S-8 (File No.
          333-40315) filed November 14, 1997.


(d)       Financial Statements of Progenitor Inc. - Included herein at pages
          S-1 through S-32.
</TABLE>


                                       86

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           INTERNEURON PHARMACEUTICALS, INC.

Date:  December 29, 1997            By:    /s/ Glenn L. Cooper, M.D.
                                           -------------------------
                                           Glenn L. Cooper, M.D.,
                                           President and Chief Executive Officer

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons in the capacity
and as of the date indicated.

<TABLE>
<CAPTION>
          Name                              Title                                      Date
          <S>                                <C>                                       <C>

 /s/ Glenn L. Cooper, M.D.                  President and Chief Executive            December 29, 1997
-------------------------                   Officer and Director (Principal
Glenn L. Cooper, M.D.                       Executive Officer)

/s/ Lindsay Rosenwald                       Chairman of the                          December 29, 1997
--------------------------------            Board of Directors
Lindsay Rosenwald, M.D.                     

/s/ Harry Gray                              Director                                 December 29, 1997
--------------------------------
Harry Gray


 /s/ Alexander M. Haig, Jr.                 Director                                 December 29, 1997
--------------------------------
Alexander M. Haig, Jr.

 /s/ Peter Barton Hutt                      Director                                 December 29, 1997
-----------------------------------
Peter Barton Hutt

 /s/ Malcolm Morville                       Director                                 December 29, 1997
---------------------------------
Malcolm Morville

 /s/ Robert K. Mueller                      Director                                 December 29, 1997
----------------------------------
Robert K. Mueller

/s/ Lee J. Schroeder                        Director                                 December 29, 1997
-----------------------------------
Lee J. Schroeder

/s/ David B. Sharrock                       Director                                 December 29, 1997
----------------------------------
David B. Sharrock

/s/ Richard Wurtman                         Director                                 December 22, 1997
----------------------------------
Richard Wurtman, M.D.

 /s/ Thomas F. Farb                         Executive Vice President,                December 29, 1997
---------------------------------           Treasurer and Chief Financial 
Thomas F. Farb                              Officer (Principal Financial 
                                            Officer)                     
                                            

 /s/ Dale Ritter                            Vice President, Corporate                December 29, 1997
---------------------------------           Controller and Chief Accounting
Dale Ritter                                 Officer (Principal Accounting  
                                            Officer)                       
</TABLE>
                                            

                                       87


<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

Audited Financial Statements                                                          Page
----------------------------                                                          ----


<S>                                                                                      <C>
Report of Independent Accountants......................................................F-2

Consolidated Balance Sheets -- September 30, 1997 and 1996.............................F-3

Consolidated Statements of Operations -- For the years ended
  September 30, 1997, 1996 and 1995....................................................F-4

Consolidated Statements of Stockholders' Equity -- For the years
  ended September 30, 1997, 1996 and 1995..............................................F-5

Consolidated Statements of Cash Flows -- For the years ended
  September 30, 1997, 1996 and 1995....................................................F-6

Notes to Consolidated Financial Statements.............................................F-7
</TABLE>

                                       F-1


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of Interneuron
Pharmaceuticals, Inc. as of September 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Interneuron
Pharmaceuticals, Inc. as of September 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.



COOPERS & LYBRAND L.L.P.

Boston,  Massachusetts
December 18, 1997


                                       F-2


<PAGE>

<TABLE>
<CAPTION>

                                         INTERNEURON PHARMACEUTICALS, INC.
                                            CONSOLIDATED BALANCE SHEETS
                                     (Amounts in thousands except share data)

                                                                                 September 30,       September 30,
                                                                                     1997                 1996
                                                      ASSETS                    ---------------    ---------------
<S>                                                                             <C>                 <C>    
Current assets:
     Cash and cash equivalents                                                         $ 55,820           $145,901
     Marketable securities                                                               64,549             17,068
     Accounts receivable                                                                  1,297              4,338
     Inventories                                                                            735              8,376
     Prepaids and other current assets                                                    2,056              1,324
                                                                                ---------------     --------------
             Total current assets                                                       124,457            177,007

Marketable securities                                                                    19,683              6,639
Investment in unconsolidated subsidiary                                                   4,040                  -
Property and equipment, net                                                               4,669              2,689
Other assets                                                                                 81                103
                                                                                ---------------     --------------
                                                                                       $152,930           $186,438
                                                                                ===============     ==============

                                                    LIABILITIES

Current liabilities:
     Accounts payable                                                                   $ 1,615         $    2,575
     Accrued expenses                                                                    39,153             11,604
     Deferred revenue                                                                       750              6,921
     Current portion of notes payable and capital lease obligations                         710                661
                                                                                ---------------      -------------
             Total current liabilities                                                   42,228             21,761

Long-term portion of notes payable and capital lease obligations                          1,734                542

Minority interest                                                                        12,959             19,373

Commitments and contingencies (See Notes)

                                               STOCKHOLDERS' EQUITY

Preferred stock; $.001 par value, 5,000,000 shares authorized: 
     Series B, 239,425 shares issued and outstanding at September 30, 1997 
     and 1996, respectively(liquidation preference at September 30, 1997 $3,026)          3,000              3,000
     Series C, 5,000 shares issued and outstanding at September 30, 1997
     and 1996, respectively (liquidation preference at
     September  30, 1997 $502)                                                              500                500
Common stock, par value $.001, 80,000,000 shares authorized at September 30,
     1997; 41,226,293 shares issued and 41,015,969 shares issued and outstanding
     at
     September  30, 1997 and  1996, respectively                                             41                 41
Additional paid-in capital                                                              255,693            247,999
Accumulated deficit                                                                    (162,034)          (106,778)
Unrealized net gain on marketable securities                                                 85                  -
Treasury stock, at cost, 70,483 shares at September 30, 1997 and no shares at
     September 30, 1996                                                                  (1,276)                 -
                                                                                ---------------     --------------
             Total stockholders' equity                                                  96,009            144,762
                                                                                ---------------     --------------
                                                                                       $152,930           $186,438
                                                                                ===============     ==============

                The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>



                                       F-3

<PAGE>

<TABLE>
<CAPTION>

                                         INTERNEURON PHARMACEUTICALS, INC.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (Amounts in thousands except per share data)




                                                                 For the years  ended September 30,

                                                           1997                 1996                 1995
                                                           ----                 ----                 ----
<S>                                                         <C>                  <C>                 <C>
Revenues:
     Product revenue                                      $56,824              $14,162           $        -
     Contract and license fee revenue                      11,039                8,335                3,463
                                                        ---------             --------              -------
         Total revenues                                    67,863               22,497                3,463

Costs and expenses:
     Cost of product revenue                               41,496               11,617                    -
     Research and development                              50,865               17,824               15,168
     Selling, general and administrative                   24,890               17,167                7,733
     Product withdrawal                                     7,528                    -                    -
     Purchase of in-process research and development        3,044                8,584                    -
                                                        ---------             --------         ------------
         Total costs and expenses                         127,823               55,192               22,901

Net loss from operations                                  (59,960)             (32,695)             (19,438)

Investment income, net                                      8,825                4,135                  894
Equity in net loss of unconsolidated
     subsidiary                                            (9,028)                   -                    -
Minority interest                                           4,907                  574                  563
                                                        ---------           ----------            ---------

Net loss                                                 ($55,256)            ($27,986)            ($17,981)
                                                          =======              =======              =======

Net loss per common share                                  ($1.35)              ($0.76)              ($0.59)
                                                          =======                =====                =====

Weighted average common shares
outstanding                                                41,064               37,004               30,604
                                                           ======               ======               ======
</TABLE>





               The accompanying notes are an integral part of the consolidated
financial statements.




                                       F-4

<PAGE>

<TABLE>
<CAPTION>

                                             INTERNEURON PHARMACEUTICALS, INC.
                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                 (Dollar amounts in thousands)


                                                                           Common Stock                Preferred Stock        
                                                                      ----------------------        --------------------  Additional
                                                                      Number of    Par Value         Number of             Paid-in  
                                                                       Shares      Amount             Shares      Amount    Capital 
                                                                      ------      --------          ---------     ------   ---------
                                                                                                                                    
<S>                                                                  <C>            <C>              <C>         <C>       <C>      
Balance at September 30, 1994                                         29,016,367     $29              244,425     $3,500    $67,059 
                                                                                                                                    
Proceeds from exercise of Class B Warrants                               257,107                                              1,221 
Proceeds from exercise of stock options                                   61,200                                                151 
Private placement of common stock, net of  issuance costs of $1,244    3,009,045       3                                     24,698 
Dividends on preferred stock                                                                                                    (35)
Proceeds from offering of Employee Stock Purchase Plan                    10,287                                                 70 
Proceeds from exercise of unit purchase options and Class A warrants     930,000       1                                      2,324 
Proceeds from issuance of Put Protection Rights and warrants                                                                  1,163 
Net loss                                                                                                                            
                                                                      ----------      --              -------      -----    ------- 
        Balance at September 30, 1995                                 33,284,006      33              244,425      3,500     96,651 
                                                                                                                                    
Proceeds from exercise of Class B and other warrants                   3,524,897       4                                     13,124 
Proceeds from exercise of stock options                                  740,022       1                                      3,141 
Public offering  of common stock, net of issuance costs of $850        3,000,000       3                                    109,127 
Proceeds from offering of Employee Stock Purchase Plan                    16,672                                                146 
Dividends on preferred stock                                                                                                    (35)
Shares issued in payment of dividends                                      9,935                                                105 
Issuance of common stock for technology rights                           342,792                                              8,827 
Shares and payments pursuant to private placement agreements              97,645                                                (35)
Gain on sale of stock by subsidiary                                                                                          16,348 
Stock-based compensation                                                                                                        600 
Net loss                                                                                                                            
                                                                      ----------      --              -------      -----   -------- 
        Balance at September 30, 1996                                 41,015,969      41              244,425      3,500    247,999 
                                                                                                                                    
Repurchases of common stock                                                                                                         
Proceeds from exercise of stock options and warrants                     154,902                                               (163)
Proceeds from offering of Employee Stock Purchase Plan                                                                         (109)
Dividends on preferred stock                                                                                                    (35)
Proceeds from modification of call options                                                                                      500 
Issuance of common stock for technology rights                            55,422                                                108 
Gain on sale of stock by subsidiary                                                                                           7,291 
Stock-based compensation and other                                                                                              102 
Unrealized net gain on marketable securities                                             
Net loss                                                                                                                            
                                                                     -----------     ---              -------     ------   -------- 
        Balance at September 30, 1997                                 41,226,293     $41              244,425     $3,500   $255,693 
                                                                     ===========     ===              =======     ======   ======== 
                                                                                                                          
</TABLE>


<TABLE>
<CAPTION>

                                                                                                     Treasury Stock
                                                                                    Unrealized Net  -----------------     Total
                                                                        Accumulated      Gain        Number of         Stockholders'
                                                                           Deficit   on Securities    Shares   Amount     Equity
                                                                        -----------  -------------  ----------------- -------------

<S>                                                                       <C>          <C>           <C>        <C>         <C>
Balance at September 30, 1994                                             $(60,811)                                         $9,777

Proceeds from exercise of Class B Warrants                                                                                   1,221
Proceeds from exercise of stock options                                                                                        151
Private placement of common stock, net of  issuance costs of $1,244                                                         24,701
Dividends on preferred stock                                                                                                   (35)
Proceeds from offering of Employee Stock Purchase Plan                                                                          70
Proceeds from exercise of unit purchase options and Class A warrants                                                         2,325
Proceeds from issuance of Put Protection Rights and warrants                                                                 1,163
Net loss                                                                   (17,981)                                        (17,981)
                                                                           --------                                        --------
        Balance at September 30, 1995                                      (78,792)                                         21,392

Proceeds from exercise of Class B and other warrants                                                                        13,128
Proceeds from exercise of stock options                                                                                      3,142
Public offering  of common stock, net of issuance costs of $850                                                            109,130
Proceeds from offering of Employee Stock Purchase Plan                                                                         146
Dividends on preferred stock                                                                                                   (35)
Shares issued in payment of dividends                                                                                          105
Issuance of common stock for technology rights                                                                               8,827
Shares and payments pursuant to private placement agreements                                                                   (35)
Gain on sale of stock by subsidiary                                                                                         16,348
Stock-based compensation                                                                                                       600
Net loss                                                                   (27,986)                                        (27,986)
                                                                          ---------                                     ---------- 
        Balance at September 30, 1996                                     (106,778)                                        144,762

Repurchases of common stock                                                                          217,500   $(3,978)     (3,978)
Proceeds from exercise of stock options and warrants                                                (120,150)    2,224       2,061
Proceeds from offering of Employee Stock Purchase Plan                                               (16,152)      291         182
Dividends on preferred stock                                                                                                   (35)
Proceeds from modification of call options                                                                                     500
Issuance of common stock for technology rights                                                                                 108
Gain on sale of stock by subsidiary                                                                                          7,291
Stock-based compensation and other                                                                   (10,715)      187         289
Unrealized net gain on marketable securities                                                 $85                                85
Net loss                                                                   (55,256)                                        (55,256)
                                                                         ----------          ---      ------   --------     -------
        Balance at September 30, 1997                                    $(162,034)          $85      70,483   $(1,276)     $96,009
                                                                         ==========          ===      ======   ========     =======
</TABLE>


                            The accompanying notes are an integral part of the
consolidated financial statements.

                                       F-5



<PAGE>

<TABLE>
<CAPTION>
                                         INTERNEURON PHARMACEUTICALS, INC.
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               (Amounts in thousands)

                                                                       For the years ended September 30,

                                                            1997                     1996                1995
                                                         -----------              ---------            ---------
<S>                                                         <C>                      <C>                  <C> 
Cash flows from operating activities:
     Net loss                                               ($55,256)              ($27,986)          ($17,981)
     Adjustments to reconcile net loss to net cash
     used by operating activities:
             Depreciation and amortization                     1,472                    889                715
             Loss (gain) on disposal of fixed assets              12                     38                (34)
             Minority interest in net loss of consolidated
                subsidiaries                                  (4,907)                  (574)              (563)
             Purchase of in-process research and development   2,234                  8,098                  -
             Noncash compensation                                434                  1,422                  -
             Equity in net loss of unconsolidated subsidiary   9,028                      -                  -
             Change in assets and liabilities, net of
                effects from deconsolidation:
                Accounts receivable                            2,787                 (4,101)                 -
                Prepaid and other current assets              (8,348)                (1,135)              (196)
                Other assets                                     (36)                   327                 10
                Inventories                                    7,641                 (8,376)                 -
                Accounts payable                                 114                  1,414                 44
                Deferred revenue                              (6,171)                 6,921                  -
                Accrued expenses and other liabilities        31,099                  3,633              2,129
                                                             -------               --------           --------
Net cash (used) by operating activities                      (19,897)               (19,430)           (15,876)
                                                              ------                 ------             ------

Cash flows from investing activities:
     Capital expenditures                                     (3,273)                (1,850)              (504)
     Proceeds from sale of fixed assets                            -                     63                 47
     Purchases of marketable securities                      (85,971)               (56,641)           (22,465)
     Proceeds from maturities and sales of
             marketable securities                            25,531                 51,141              8,614
     Purchases of Intercardia stock                           (2,951)                     -                  -
     Purchases of Progenitor units and stock                  (3,605)                     -                  -
     Cash effect of deconsolidation of subsidiary                (12)                     -                  -
                                                           ----------           -----------         ----------
Net cash (used) by investing activities                      (70,281)                (7,287)           (14,308)
                                                              ------                -------           ---------

Cash flows from financing activities:
     Net proceeds from issuance of common and
             treasury stock and other financing activities     2,819                125,510             29,630
     Net proceeds from issuance of stock by
             subsidiaries                                        333                 30,569              6,070
     Purchases of treasury stock                              (3,978)                     -                  -
     Proceeds from sale/leaseback                              1,636                    313                324
     Proceeds from notes payable                                 156                     16                  -
     Principal payments of notes payable                         (35)                     -                  -
     Principal payments of capital lease obligations            (834)                  (571)              (416)
                                                           ----------              ---------          --------
Net cash provided by financing activities                         97                155,837             35,608
                                                          ----------                -------             ------

Net change in cash and cash equivalents                      (90,081)               129,120              5,424
Cash and cash equivalents at beginning of period             145,901                 16,781             11,357
                                                          ----------             ----------         ----------

Cash and cash equivalents at end of period                 $  55,820               $145,901            $16,781
                                                           =========               ========            =======

Supplemental disclosure of financing and investing activities:
     Cash payments for interest                          $       311            $       330          $     146
                                                         ===========            ===========          =========
     Property and equipment obtained through
             financing arrangements                       $    1,211            $       157       $          -
                                                          ==========            ===========       ============
</TABLE>

                The accompanying notes are an integral part of the consolidated
financial statements.

                                       F-6




<PAGE>

                        INTERNEURON PHARMACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.  Nature of the Business:

Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral disorders. The Company is also developing products and technologies,
through three consolidated subsidiaries and one unconsolidated subsidiary (the
"Subsidiaries"): Intercardia, Inc. ("Intercardia") a public company and a
consolidated subsidiary, focuses on cardiovascular disease; Transcell
Technologies, Inc. ("Transcell"), a consolidated subsidiary, focuses on
carbohydrate-based drug discovery; InterNutria, Inc. ("InterNutria"), a
consolidated subsidiary, focuses on dietary supplement products; and Progenitor,
Inc. ("Progenitor") a public company and an unconsolidated subsidiary, focuses
on functional genomics using developmental biology.

On September 15, 1997, the Company and Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of American Home Products Corp. ("AHP") announced a
withdrawal of the Company's weight loss medication Redux (TM) (dexfenfluramine
hydrochloride capsules) C-IV. This action was taken based on new, preliminary
and summary information regarding potential abnormal echocardiogram findings in
patients using these medications. The market withdrawal of Redux resulted in the
recognition of certain charges to operations. In addition, the Company has been
named in certain legal actions. (See Note H.)

B.  Summary of Significant Accounting Policies:

Basis of Presentation: The consolidated financial statements include the
accounts of the Company and its wholly- and majority-owned Subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Investments in subsidiary companies which are less than majority but greater
than 20% owned are reflected using the equity method of accounting.

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Marketable Securities: The Company invests available
cash primarily in short-term bank deposits, money market funds, U.S. and foreign
commercial paper and U.S. and foreign government securities. Cash and cash
equivalents includes investments with maturities of three months or less at date
of purchase. Marketable securities consist of investments purchased



                                      F-7

<PAGE>

with maturities greater than three months and are classified as noncurrent if
they mature one year or more beyond the balance sheet date. The Company
classifies its investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time the
investments are purchased. At September 30, 1997 and 1996, all investments held
were classified as "available-for-sale."

Property and Equipment: Property and equipment are stated at cost. The Company
provides for depreciation using the straight-line method based upon the
following estimated useful lives:

Estimated Useful Lives:

Office equipment..................................................2 to 5 years

Laboratory equipment...................................................5 years

Leasehold improvements..........Shorter of lease term or estimated useful life

Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged, respectively, to operations.

Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market. For products requiring regulatory approval or compliance
prior to marketing, inventory costs are capitalized commencing from the time the
Company determines it is probable the pertinent product will be approved by or
comply with requirements of the relevant regulatory authorities including the
U.S. Food and Drug Administration ("FDA").

Revenue Recognition: Product revenue consists of product sales which are
recognized at the later of shipment or acceptance and royalties from licensed
products which are recognized when the amount of and basis for such royalties
are reported to the Company in accurate and appropriate form and in accordance
with the related license agreements. Contract and license fee revenue consists
of technology license-related payments, contractual research milestone payments,
sales and marketing payments, research and development grants and contractual
research and development funding and is recognized when services are performed
or when contractual obligations are met. Cash received in advance of revenue
recognition is recorded as deferred revenue.

Research and Development: Research and development costs are expensed in the
period incurred.

Income Taxes: Deferred tax liabilities and assets are recognized based on
temporary differences between the financial statement basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation allowance
against net deferred tax assets is established if, based on the available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. (See Note J.)

                                       F-8

<PAGE>

Accounting for Stock-Based Compensation: During the fiscal year ended September
30, 1997, the Company adopted the disclosure requirements of the Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), which changes measurement, recognition and disclosure
standards for stock-based compensation. The Company measures stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB
Opinion No. 25"). As such, the adoption of SFAS No. 123 did not impact the
financial position or the results from operations of the Company.

Issuance of Stock by a Subsidiary: Gains on the issuance of common stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is uncertain. In those situations the Company accounts for
the change in its proportionate share of the subsidiary's net assets resulting
from the additional equity raised by the subsidiary as an equity transaction and
credits any resulting gain to additional paid-in capital.

Uncertainties: The Company is subject to risks common to companies in the
biotechnology industry, including, but not limited to, litigation, product
liability, development by the Company or its competitors of new technological
innovations, dependence on key personnel, protection of proprietary technology,
and compliance with FDA government regulations.

Reclassification: Certain prior year amounts have been reclassified to conform
with fiscal 1997 classifications.

Recent Accounting Pronouncements: The Company will adopt SFAS No. 128 "Earnings
Per Share" ("SFAS No. 128"), in the fiscal quarter ending December 31, 1997.
SFAS No. 128 requires the Company to change its method of computing, presenting
and disclosing earnings per share information. Upon adoption, all prior period
data presented will be restated to conform to the provisions of SFAS No. 128.
Management does not believe there will be a material impact from the adoption of
SFAS No. 128.

The Company will adopt SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management has
not determined the effect of adopting SFAS No. 130.

The Company will adopt SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), in the fiscal year ending
September 30, 1999. SFAS No. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. Management has not determined the effect of adopting SFAS No. 131.


                                       F-9

<PAGE>

C.   Marketable Securities:

Investments in marketable securities consisted of the following at September 30,
1997 and 1996:

<TABLE>
<CAPTION>
                                                      1997                               1996
                                         ------------------------------    -------------------------------
                                                               Market                             Market
                                             Cost              Value              Cost            Value
                                             ----              ------             ----            ------
<S>                                          <C>                <C>               <C>              <C> 
U.S. government treasury
     and agency obligations               $12,768,000      $ 12,789,000      $ 2,005,000       $ 2,033,000
Foreign government and
corporate obligations                      13,904,000        13,903,000        3,260,000         3,193,000
U.S. corporate notes                       57,475,000        57,540,000       18,442,000        18,503,000
                                         ------------      ------------     ------------      ------------
                                          $84,147,000       $84,232,000      $23,707,000       $23,729,000
                                          ===========       ===========      ===========       ===========
</TABLE>


At September 30, 1997, gross unrealized gains and losses were $89,000 and
$4,000, respectively. At September 30, 1996, marketable securities were carried
at cost due to insignificant differences from market value. The maturities of
these marketable securities as of September 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                  1997              1996
                                              ------------      -----------

<S>                                            <C>              <C>        
Within one year                                $64,549,000      $17,068,000
After one year through three years              19,683,000        6,639,000
                                              ------------      -----------
Total maturities                               $84,232,000      $23,707,000
                                              ============      ===========
</TABLE>

D.   Inventories:

At September 30, 1997 and 1996, inventories consisted of the following:

<TABLE>
<CAPTION>
                                                    1997            1996
                                                 ---------      -----------

<S>                                               <C>            <C>       
Raw materials                                     $221,000       $5,420,000
Finished goods                                     514,000        2,956,000
                                                 ---------      -----------
                                                  $735,000       $8,376,000
                                                  ========       ==========
</TABLE>


At September 30, 1997, inventories related primarily to PMS Escape and at
September 30, 1996, inventories related primarily to Redux. At September 30,
1997, the Company has fully reserved all Redux-related inventories in connection
with the market withdrawal of Redux (see Note H).

E.  Property and Equipment:

At September 30, 1997 and 1996, property and equipment consisted of the
following:

<TABLE>
<CAPTION>
                                                    1997              1996
                                                -------------      ----------
<S>                                              <C>               <C>       
Office equipment                                 $2,131,000        $1,622,000
</TABLE>




                                      F-10

<PAGE>

<TABLE>
<CAPTION>
<S>                                               <C>               <C>      
Laboratory equipment                              2,093,000         2,612,000
Leasehold improvements                            2,362,000           242,000
                                                 ----------        ----------
                                                  6,586,000         4,476,000
Less:  accumulated depreciation
           and amortization                      (1,917,000)       (1,787,000)
                                                  ---------         ---------
                                                 $4,669,000        $2,689,000
                                                 ==========        ==========
</TABLE>

Included in the above amounts is property and equipment under capital lease
obligations of $2,713,000 and $2,169,000 at September 30, 1997 and 1996,
respectively, and related accumulated depreciation of $1,149,000 and $845,000 at
September 30, 1997 and 1996, respectively. Leased assets consist primarily of
laboratory equipment. The Company paid $165,000 and $158,000 in interest expense
during the years ended September 30, 1997 and 1996, respectively, related to
these capital lease obligations.

F.  Accrued Expenses:

At September 30, 1997 and 1996, accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                                1997                   1996
                                           --------------        --------------
<S>                                         <C>                   <C>          
Professional fees                           $     528,000         $     947,000
Clinical and sponsored research                21,077,000             5,490,000
Compensation related                            3,949,000             3,058,000
Redux withdrawal                               11,620,000                     -
Other                                           1,979,000             2,109,000
                                           --------------         -------------
                                              $39,153,000           $11,604,000
                                             ============          ============
</TABLE>

G.  Commitments and Obligations:

The Company leases its facilities, as well as certain laboratory equipment and
furniture, under non-cancelable operating leases. Rent expense under these
leases was approximately $1,931,000, $1,195,000 and $1,055,000 for the years
ended September 30, 1997, 1996 and 1995, respectively. The Company also leases
certain property and equipment under capital leases.

At September 30, 1997, the Company's future minimum payments under
non-cancelable lease arrangements are as follows:

<TABLE>
<CAPTION>
         Fiscal Year                      Operating Leases        Capital Leases
         -----------                      ----------------        --------------
         <S>                                  <C>                    <C>      
         1998                                 $ 2,036,000            $ 768,000
         1999                                   1,944,000              678,000
         2000                                   1,885,000              520,000
         2001                                   1,787,000               81,000
         2002                                   1,655,000                    -
         Thereafter                             4,606,000                    -
                                            -------------           ------------
Total lease payments                          $13,913,000            2,047,000
                                              ===========
</TABLE>



                                      F-11

<PAGE>

<TABLE>
<CAPTION>
<S>                                                               <C>      
Less: amount representing interest                                (236,000)
                                                               -----------
Present value of net minimum lease payments                    $ 1,811,000
                                                               ===========
</TABLE>

At September 30, 1997, the Company's note obligations consisted of approximately
$633,000 in note payable agreements (the "Notes"). The Notes require monthly,
semi-monthly or single payments, accrue interest at rates ranging from
approximately 5.8% to approximately 11.5% and expire at various dates through
June 2002. At September 30, 1997, $73,000 of these note obligations has been
classified as current .


H.  Withdrawal of Redux, Legal Proceedings, and Related Contingencies:

On September 15, 1997, the Company and Wyeth-Ayerst announced a market
withdrawal of the weight loss medication Redux. On September 12, 1997, the FDA
provided the Company and Wyeth-Ayerst and manufacturers and marketers of
phentermine with new preliminary and summary information (which has recently
been updated and revised by the FDA) concerning potential abnormal
echocardiogram findings in patients using these drugs. These patients had been
treated with fenfluramine or Redux for up to 24 months, most often in
combination with phentermine. Redux was launched in June 1996.

These observations reflected a preliminary analysis of pooled information rather
than results of a formal clinical investigation, and are difficult to evaluate
because of the absence of matched controls and pretreatment baseline data for
these patients. Nevertheless, the Company believes it was prudent, in light of
this information, to have withdrawn Redux from the market.

In connection with the market withdrawal of Redux, the Company recorded certain
charges aggregating approximately $10,800,000. Of this amount, approximately (i)
$3,300,000 (included in cost of revenues) related to reserves for inventories of
dexfenfluramine drug substance and finished Redux capsules which were deemed to
have no net realizable value and (ii) $7,500,000 related to costs or commitments
associated with product development, litigation, the cessation of production of
Redux capsules and other costs. Total expenses relating to the market withdrawal
of Redux may exceed these amounts which are current estimates and do not include
provisions for liability, if any, arising out of Redux-related litigation or
other related costs which are not currently determinable.

Interneuron has been named, together with other pharmaceutical companies, as a
defendant in approximately 200 legal actions, many of which purport to be class
actions, in federal and state courts involving the use of Redux and other weight
loss drugs. On December 10, 1997, the federal Judicial Panel on Multidistrict
Litigation issued an Order allowing for the transfer or potential transfer of
the federal actions to the Eastern District of Pennsylvania for coordinated or
consolidated pretrial proceedings. The Company has also been named as a
defendant in several lawsuits filed by alleged purchasers of the Company's
common stock, purporting to be class actions, claiming violation of the federal
securities laws. It is not possible for the Company to determine its costs
related to its defense in these or potential future legal actions, monetary or
other damages which may

                                      F-12

<PAGE>

result from such legal actions, or the effect on the future operations of the
Company. The withdrawal of Redux and related events may materially adversely
affect the Company and its financial condition.

I.  Stockholders' Equity:

Preferred Stock: The Certificate of Incorporation of the Company authorizes the
issuance of 5,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including the dividend, conversion,
voting, redemption (including sinking fund provisions), and other rights,
liquidation preferences, and the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders of the Company. In fiscal 1993, the Company issued shares of Series
B and Series C Preferred Stock in connection with an agreement with AHP. (See
Note L).

Common Stock and Warrants: Class B Warrants, which were issued in connection
with the Company's initial public offering in 1990, entitled the holder to
purchase one share of Common Stock at $4.75 per share, from the date of issuance
through March 15, 1996. During fiscal 1995, 257,107 Class B Warrants were
exercised and proceeds of approximately $1,221,000 were realized by the Company.
During fiscal 1996, approximately 2,402,000 Class B Warrants were exercised
(including 165,000 that were exercised on a cashless basis by an affiliate of
the Company resulting in the issuance of 138,432 shares of Common Stock of the
Company) resulting in net proceeds to the Company of approximately $10,612,000
and the issuance of approximately 2,375,000 shares of Common Stock.

Also in connection with the Company's initial public offering in 1990, the
Company provided the underwriter with Unit Purchase Options ("UPO's") to
purchase up to 155,000 units for $8.40 per unit. In fiscal 1995, all 155,000
UPO's and underlying Class A Warrants were exercised resulting in proceeds of
$2,325,000 and issuance of 930,000 shares of the Company's Common Stock and
465,000 Class B Warrants, which were exercised in full in fiscal 1996.

In fiscal 1995, the Company completed private placements of 3,009,045 shares of
its Common Stock, at prices ranging from $3.75 to $13.08 per share, which
resulted in net proceeds of approximately $24,701,000. Additionally, as part of
the private placements, the Company issued warrants to purchase 653,000 shares
of its Common Stock. At September 30, 1997, 632,500 of these warrants were
outstanding at prices ranging from $5.00 to $13.08 per share and expire from
August 16, 2000 to February 3, 2005.

In January 1996, the Company issued 342,792 shares of Common Stock for the
purchase of the 20% of outstanding capital stock of CPEC, Inc. ("CPEC") not
owned by Intercardia. (See Note M.)

In June 1996, the Company completed a public offering of 3,000,000 shares of
Common Stock at $39.00 per share and received proceeds, net of issuance costs,
of approximately $109,130,000.




                                      F-13

<PAGE>

At the Company's annual meeting of stockholders on March 5, 1997, the Company's
stockholders approved an increase to the number of authorized shares of Common
Stock from 60,000,000 to 80,000,000.

During fiscal 1995, certain Subsidiaries issued convertible preferred stock
through private placements which resulted in net proceeds of approximately
$7,233,000 (the "Subsidiaries' Private Placements"). In connection with certain
of the Subsidiaries' Private Placements, the Company issued 218,125 warrants to
purchase shares of the Company's Common Stock exercisable at $4.625 per share
until June 30, 1998 (the "Warrants") of which 40,000 Warrants were outstanding
at September 30, 1997. Additionally, investors in the private placements have
the ability on June 30, 1998 to cause the Company to purchase from them certain
amounts of the convertible preferred stock deemed to be illiquid but in no
circumstance for an amount greater than that initially paid by the investor (the
"Put Protection Rights") that could have caused the Company to issue in June
1998 up to approximately 4,095,000 shares of the Company's Common Stock. The
Company received approximately $1,163,000 from the proceeds of the offerings as
consideration for its issuance of the Warrants and the Put Protection Rights,
which was recorded as an equity issuance by the Company. The Company may pay
cash or issue its Common Stock to settle any obligations arising from the Put
Protection Rights and intends to choose settlement through issuance of its
Common Stock. At September 30, 1997, as a result of the Intercardia and
Progenitor IPO's which reduced the Company's potential obligations under the Put
Protection Rights (see Note N), the Company could be required to issue up to a
maximum aggregate of approximately 232,000 shares of Common Stock under certain
circumstances if the Put Protection Rights were exercised in full and the
Company's Common Stock is valued at $2.00 per share or less. In connection with
these private placements, the Company issued to designees of the Placement
Agent, which is an affiliate of the Company (see Note K), warrants to purchase
21,813 shares of Common Stock at $4.625 per share, exercisable through June 30,
1998. At September 30, 1997, 20,563 of these warrants were outstanding.
Investors also received registration rights relating to the shares underlying
the Warrants and Put Protection Rights.

Stock Options and Warrants: Under the Company's 1989 Stock Option Plan (the
"1989 Plan"), incentive or non-qualified options to purchase 3,000,000 shares of
the Company's Common Stock and under the Company's 1994 Long-Term Incentive Plan
(the "1994 Plan"), incentive or non-qualified options to purchase 6,000,000
shares of the Company's Common Stock may be granted to employees and directors
and consultants may be granted non-qualified options. Under the 1989 and 1994
Plans ("the Plans") the term of each grant cannot exceed ten years.

The Company has also granted outside of the Plans options to purchase shares of
the Company's Common Stock ("Non-Plan Options"). At September 30, 1997, 100,000
Non-Plan Options were outstanding.

The Company has issued warrants to purchase shares of the Company's Common
Stock, certain of which were issued in connection with various financing
arrangements and have been disclosed in this and other Notes to the Consolidated
Financial Statements.




                                      F-14

<PAGE>

Presented below under the caption "Stock Options" is all Plan and Non-Plan
option activity and under the caption "Warrants" is all warrant activity,
exclusive of Class A and B warrant activity, certain of which may also be
disclosed in this and other Notes to the Consolidated Financial Statements:

<TABLE>
<CAPTION>
                                                  Stock Options                                Warrants
                                        --------------------------------             -----------------------------

                                                           Weighted Average
                                          Shares            Exercise  Price             Shares           Warrant  Price
                                        ----------         ----------------          -----------        ----------------
<S>                                     <C>                      <C>                   <C>              <C>  
Outstanding at
September 30, 1994                      2,919,841                $7.22                 1,145,000        $4.00 - $14.00

  Granted                               1,225,200                $7.10                   893,438        $4.63 - $13.08

  Exercised                               (61,200)               $2.46                         -

  Canceled                                 (2,400)               $6.46                         -
                                     -------------                               ---------------
Outstanding at
September 30, 1995                      4,081,441                $7.25                 2,038,438        $4.00 - $14.00

  Granted                                 848,300               $23.56                    75,000        $23.25

  Exercised                              (740,021)               $4.24                (1,309,125)       $4.00 - $14.00

  Canceled                               (298,000)              $27.22                         -
                                       ----------                               ----------------
Outstanding at
September 30, 1996                      3,891,720                $9.85                   804,313        $4.63 - $23.25

  Granted                               1,477,000               $21.71                    50,000        $18.25 - 20.25

  Exercised                              (271,896)               $7.53                    (3,156)       $4.63

  Canceled                                (14,750)              $19.19                   (20,000)       $23.25
                                      -----------                                  --------------

Outstanding at
September 30, 1997                      5,082,074               $13.39                   831,157        $4.63 - $23.25
                                        =========                                    ===========
</TABLE>



                                      F-15

<PAGE>

At September 30, 1997, outstanding stock options were exercisable as follows:

<TABLE>
<CAPTION>
                                      Outstanding                                                        Exercisable
                         -----------------------------------------------------------------  ----------------------------------------


                                                  Weighted Average
   Range of Exercise                                 Remaining            Weighted Average                         Weighted Average
         Price                 Number             Contractual Life         Exercise Price          Number           Exercise Price
         -----                 -------            ----------------         --------------          ------           --------------
     <S>                      <C>                   <C>                       <C>                 <C>                     <C>  
     $ 0.83-$ 7.88             1,337,573             5.5 years                 $ 6.38              929,923                 $6.34
     $ 8.13-$ 9.75             1,309,000             5.9 years                 $ 9.00            1,309,000                 $9.00
     $ 9.88-$20.13             1,843,951             8.6 years                 $17.52              400,459                $13.18
     $20.25-$32.00               591,550             9.2 years                 $26.16               59,525                $23.58
                               --------                                                        ------------
     $ 0.83-$32.00             5,082,074             7.2 years                 $13.39            2,698,907                 $9.02
                               =========                                                       ============
</TABLE>


All outstanding options vest at various rates over periods up to six years and
expire at various dates from August 1, 1999 to September 23, 2007. At September
30, 1996, 2,210,998 options were exercisable at a weighted average exercise
price of $7.95.

At September 30, 1997, outstanding warrants were exercisable as follows:

<TABLE>
<CAPTION>
Range of Exercise Prices                Number Outstanding             Number Exercisable
------------------------                ------------------             ------------------

<S>                                               <C>                           <C>    
$4.625-$9.00                                       163,657                       163,657
$10.00                                             500,000                       500,000
$12.765-$23.25                                     167,500                       122,500
                                                   -------                       -------
                                                   831,157                       786,157
                                                   =======                       =======
</TABLE>

At September 30, 1997, all outstanding warrants expire at various dates from
June 30, 1998 to September 16, 2006 and have a weighted average exercise price
of $10.63 per share.

Employee Stock Purchase Plan: On March 22, 1995, the Company's stockholders
approved the Company's 1995 Employee Stock Purchase Plan (the "1995 Plan")
covering an aggregate of 100,000 shares of Common Stock which is offered in
one-year offerings (an "Offering"), the first of which began April 1, 1995. Each
Offering is divided into two six-month Purchase Periods (the "Purchase
Periods"). Stock is purchased at the end of each Purchase Period with employee
contributions at the lower of 85% of the last sale price of the Company's Common
Stock on the first day of an Offering or the last day of the related Purchase
Period. In fiscal 1997, 1996, and 1995, 16,152, 16,672, and 10,287 shares,
respectively, of Common Stock have been purchased pursuant to the 1995 Plan.

Pro Forma Net Income Information: Pro forma information regarding net loss shown
below was determined as if the Company and its consolidated Subsidiaries had
accounted for employee stock options and shares purchased under stock purchase
plans under the fair value method of SFAS No.



                                      F-16

<PAGE>

123. The fair value of each option grant is estimated on the date of the grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:

<TABLE>
<CAPTION>
                                                                        1997                1996
                                                                        ----                ----
<S>                                                                     <C>                  <C>
Dividend yield                                                          0%                   0%
Expected volatility                                                   60%-70%              60%-70%
Risk-free interest rate                                              6.0%-6.9%           5.4%-  6.9%
Expected option life                                                  5 years              5 years
Weighted average grant date fair value:
         Interneuron                                                  $12.81               $10.93
         Intercardia                                                  $11.46               $13.28
         Transcell                                                    $  .17                $ .57
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's and its consolidated Subsidiaries'
employee stock options have characteristics significantly different from those
of traded options such as vesting restrictions and extremely limited
transferability. In addition, the assumptions used in option valuation models
are highly subjective, particularly the assumption of expected stock price
volatility of the underlying stock. Changes in these subjective assumptions can
materially affect the fair value estimate.

For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The below pro forma net
loss and net loss per share amounts only include option grants within the last
two years. The pro forma effect on net loss for the fiscal years ended September
30, 1997 and 1996 may not be representative of the pro forma effect on net
income or loss in future years. The Company's pro forma information is as
follows for the fiscal years ended September 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                 1997                            1996
                                      -------------------------------------------------------------
<S>                                   <C>             <C>              <C>             <C> 
                                      As Reported      Pro Forma       As Reported      Pro Forma
                                      -----------      ---------       -----------      ---------
Net loss                              $55,256,000     $62,773,000      $27,986,000      $29,884,000
Net loss per share                         $1.35         $1.53             $0.76           $0.81
</TABLE>



Treasury Stock and Stock Repurchases: In March 1997, the Company announced that
its Board of Directors had authorized it to repurchase from time to time through
open-market transactions up to 1,500,000 shares of the Company's Common Stock.
As of September 30, 1997, the Company had repurchased 217,500 shares, for an
aggregate purchase price of approximately $3,978,000, of which 147,017 shares
were re-issued pursuant to stock option and warrant exercises and an employee
stock purchase plan.


Call Options: In May 1997, the Company purchased in private transactions from
Swiss Bank Corporation, London Branch ("SBC") capped call options, which were
subsequently modified, on Interneuron Common Stock. As modified, these call
options give Interneuron the right to purchase

                                      F-17

<PAGE>

from SBC up to a total of 1,240,000 shares of Interneuron Common Stock at a
strike price of $14.50. The call options are exercisable only at their
maturities, which are December 31, 1997, June 9, 1998, September 21, 1998 and
January 11, 1999 each with respect to 310,000 shares, and are subject to caps of
$22.50, $29.50, $32.50 and $34.50, respectively, which limit the potential
economic benefit to the Company of these call options if exercised. The call
options which the Company purchased may be settled, if exercised, with cash in
an amount equal to the difference between the strike price and the market price,
determined over a specified valuation period, subject to the caps. Under certain
circumstances, the Company may delay the expiration date of these call options
for the payment of additional consideration to SBC.

In exchange for the purchases of these call options, in lieu of cash purchase
prices, the Company sold to SBC call options entitling SBC to purchase from the
Company at a strike price of $36.00 per share, an aggregate of 2,000,000 shares
of Interneuron Common Stock, 1,000,000 shares on each of December 30 and 31,
1999. Modification to the original options, which consisted of extensions of
maturity dates and reductions of the caps and strike prices, resulted in a
$500,000 cash payment to the Company. The Company will have the right to settle
these call options with cash or stock, subject to certain conditions. If
exercised, the Company expects to settle the call options that it sold through
issuances by the Company to SBC of up to an aggregate of 2,000,000 shares of
Common Stock, subject to the effectiveness of a registration statement covering
the resale of these shares delivered. Because the Company has the ability to
settle call options through issuance or receipt of Common Stock, the Company has
accounted for the original purchases and sales of these call options as
equivalent and offsetting noncash equity transactions. Any gains realized from
purchased call options will be reflected in additional paid-in capital. The
additional $500,000 received in cash for the subsequent modification to the
original options is reflected as a credit to additional paid-in capital .

Other: In addition to the 41,156,000 shares of Common Stock outstanding at
September 30, 1997, there were approximately 16,400,000 potentially issuable
shares of Common Stock ("Reserved Common Shares"). Included in the number of
Reserved Common Shares are the following: (i) 4,756,000 shares of Common Stock
reserved for issuance upon conversion of the Company's authorized but unissued
Preferred Stock; (ii) 622,222 shares of Common Stock issuable upon conversion of
issued and outstanding Preferred Stock; (iii) 232,000 shares reserved for the
maximum number of shares issuable under the Put Protection Rights, which assumes
exercise for the full amount possible; (iv) 7,600,000 shares reserved for
issuance under the Plans and the 1995 Plan, (of which approximately 5,100,000
stock options were outstanding not all of which were vested); (v) an estimated
270,000 shares issuable in connection with certain acquisitions; (vi)
approximately 931,000 shares reserved for issuance from exercise of outstanding
warrants and Non-Plan Options; and (vii) 2,000,000 shares reserved for issuance
pursuant to call options potentially exercisable by SBC.

J.  Income Taxes:

At September 30, 1997 and 1996, the significant components of the Company's
deferred tax asset consisted of the following:

<TABLE>
<CAPTION>
                                                                 1997                       1996
                                                                 ----                       ----
<S>                                                              <C>                        <C>   
</TABLE>



                                      F-18

<PAGE>

<TABLE>
<CAPTION>

<S>                                                              <C>                        <C> 
Federal and state net operating loss
          carryforwards                                        $36,728,000               $38,798,000
Federal and state tax credit carryforwards                       3,922,000                 3,721,000
Deferred revenue and accrued expenses                           16,076,000                 3,723,000
Investment in unconsolidated subsidiary                         10,000,000                         -
                                                                ----------              ------------
Total deferred tax asset before
          valuation allowance                                   66,726,000                46,242,000
Valuation allowance against total
          deferred tax asset                                   (66,726,000)              (46,242,000)
                                                               ------------              ------------

Net deferred tax asset                                         $         -               $         -
                                                               ============              ============
</TABLE>

At September 30, 1997, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $98,000,000 which
expire at various dates from 2004 to 2012. In addition, the Company had
approximately $4,000,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2012. The Company's ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code.

Due to the uncertainty surrounding the realization of favorable tax attributes
in future tax returns, all of the deferred tax assets have been fully offset by
a valuation allowance.

K.  Related Party Transactions:

During fiscal 1995, Paramount Capital, Inc. ("Paramount") served as placement
agent for the Subsidiaries' Private Placements (see Note I). Lindsay A.
Rosenwald, M.D., the Chairman of the Board and a principal stockholder of the
Company, is the Chairman, Chief Executive Officer and sole stockholder of
Paramount.

Paramount earned $657,000 in commissions related to the Subsidiaries' Private
Placements. In addition, the Company issued to Dr. Rosenwald and other designees
of Paramount warrants to purchase a total of 21,813 shares of the Company's
Common Stock at $4.625 per share, exercisable through June 30, 1998.

D.H. Blair and Co., Inc. ("Blair") was a selected dealer associated with the
Subsidiaries' Private Placements. Blair is substantially owned by relatives of
the sole stockholder of the parent of D.H. Blair Investment Banking Corp., a
principal stockholder of the Company. Blair earned $113,000 in commissions
related to the Subsidiaries' Private Placements. Designees of Paramount
(including Dr. Rosenwald) and Blair also received warrants to purchase an
aggregate of 10% of the preferred stock of the Subsidiaries sold in the
Subsidiaries' Private Placements. These warrants represent less than 1% of the
subsidiaries outstanding stock at September 30, 1997.

Under consulting agreements with two directors and a party related to a director
to provide scientific advice and administrative services, the Company is
obligated to make monthly payments, generally



                                      F-19

<PAGE>

for a one year period subject to annual renewals. Payments were $281,000,
$180,000, and $174,000 for the years ended September 30, 1997, 1996 and 1995,
respectively. Also, one of these directors received additional payments in
fiscal 1996 aggregating approximately $103,000 related to certain patent matters
and the April 1996 FDA approval of Redux. Another director has a three year
consulting agreement with the Company to provide services for a total of up to
$120,000. Payments under this agreement were $25,000, $32,000, and $36,000, in
fiscal 1997, 1996, and 1995, respectively.

In fiscal 1996, InterNutria acquired certain technology from AVAX Technologies,
Inc. (formerly Walden Laboratories, Inc.) ("AVAX") of which certain of the
Company's directors are or were stockholders (see Note M).

The Company made contributions of $147,000, $182,000, and $147,000 in the years
ended September 30, 1997, 1996 and 1995, respectively, to The Center for Brain
Science and Metabolism Charitable Trust of which one of the Company's directors
is the scientific director.

L.  Agreements:

Servier: In February 1990, as amended, the Company entered into a series of
agreements with Les Laboratoires Servier ("Licensor") under which the Company
licensed U.S. marketing rights to dexfenfluramine, a prescription drug developed
by the Licensor for the treatment of obesity associated with carbohydrate
craving in exchange for royalty payments based upon net product sales, as
defined. Additionally, the agreements required the Company to purchase the bulk
compound from an affiliate of the Licensor and to the Licensor 11.5% of net
sales of the products by AHP. During fiscal 1997 and 1996, the Company incurred
expense and paid to the Licensor royalties of approximately $20,000,000 and
$3,800,000, respectively. (See Note H.)

American Home Products: In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by AHP) for the
development and marketing in the U.S. of dexfenfluramine for use in treating
obesity associated with carbohydrate craving. On this date, the Company received
$2,000,000 for a patent license and sold to AHP 239,425 shares of its
convertible Series B Preferred Stock for $3,000,000. Holders of Series B
Preferred Stock are entitled to receive mandatory dividends of $.1253 per share
payable at the election of the Company in cash or Common Stock. Such dividends
are payable annually on April 1 of each year, accrue on a daily basis and are
cumulative. Holders of Series B Preferred Stock are also entitled to a
liquidation preference of $12.53 per share, plus accumulated and unpaid
dividends. Holders of Series B Preferred Stock are entitled to convert such
shares into an aggregate of 533,334 shares of Common Stock (a conversion price
of $5.625 per share) subject to adjustment in the event of future dilution.
Additionally, the agreement with AHP provides for royalty payments to the
Company based upon net sales of dexfenfluramine and for AHP to share equally
with the Company certain research and development expenses.


                                      F-20

<PAGE>

In June 1993, the Company received payments from AHP in connection with the
submission of a New Drug Application ("NDA") for dexfenfluramine, consisting of
$2,500,000 in a milestone payment and $500,000 through the purchase of 5,000
shares of convertible Series C Preferred Stock. Holders of Series C Preferred
Stock are entitled to receive mandatory dividends of $1.00 per share payable
annually on April 1, of each year, which accrue on a daily basis and are
cumulative. Holders of Series C Preferred Stock are also entitled to a
liquidation preference of $100 per share, plus accumulated and unpaid dividends.
Holders of Series C Preferred Stock are entitled to convert such shares into an
aggregate of 88,888 shares of Common Stock of the Company (a conversion price of
$5.625 per share) subject to anti-dilution adjustment. Holders of the Series B
and C Preferred Stock are entitled to vote on all matters submitted to a vote of
stockholders other than the election of directors, generally holding the number
of votes equal to the number of shares of Common Stock into which such shares of
Preferred Stock are convertible.

AHP has the right to terminate its sublicense upon twelve months notice to the
Company. The AHP agreements provide that Servier has the right to withdraw its
consent to the sublicense in the event that any entity acquires stock in AHP
sufficient to elect a majority of AHP's Board of Directors or otherwise obtains
control of AHP, provided that no such withdrawal shall occur if AHP or its
successor achieves minimum net sales of $75,000,000 in the first marketing year
or $100,000,000 [per marketing year] thereafter or pays Servier amounts to which
it would have been entitled if AHP had achieved such minimum net sales. Servier
consented to the AHP acquisition of American Cyanamid Company.

On April 29, 1996, dexfenfluramine received FDA clearance for marketing under
the name Redux. The Company's License Agreement with AHP provides for base
royalties equal to 11.5% of AHP's net sales and additional royalties ranging
from 5% of the first $50,000,000 of AHP's annual net sales if Redux is a
scheduled drug to 10% of AHP's annual net sales over $150,000,000, providing
Redux is supplied to AHP by the Company. AHP is contractually required to make
quarterly royalty payments to the Company for net sales of Redux. The Company
has manufactured Redux through an arrangement with Boehringer Ingelheim
Pharmaceuticals, Inc. ("Boehringer") and has been the exclusive supplier of
Redux to AHP. On September 15, 1997, the Company and AHP announced a market
withdrawal of Redux. (See Note H.)

Boehringer: In November 1995, the Company entered into an exclusive
manufacturing agreement with Boehringer under which Boehringer agreed to supply,
and the Company agreed to purchase from Boehringer, all of the Company's
requirements for dexfenfluramine capsules. The contract, which expires December
31, 1998, contains certain minimum purchase and insurance commitments by the
Company and requires conformance by Boehringer to the FDA's Good Manufacturing
Practices regulations. (See Note H.)

Ferrer: The Company has licensed from Ferrer International, S.A. ("Ferrer")
exclusive rights in the U.S. Puerto Rico and Canada to certain uses of
citicoline, a drug for potential treatment for ischemic stroke, for
commercialization. A license fee and future royalties on net sales of citicoline
were consideration provided to Ferrer.




                                      F-21

<PAGE>

Rhone-Poulenc Rorer: In February 1994, the Company entered into a license
agreement with Rhone-Poulenc Rorer S.A. ("RPR"), granting the Company worldwide
exclusive rights to an anti-anxiety compound (pagoclone). License fees,
milestone payments and future royalties on net sales were consideration provided
to RPR.

Eli Lilly: In June 1997, the Company entered into an agreement with Eli Lilly
and Co. and Eli Lilly S.A. ("Lilly") relating to the licensing by Lilly from the
Company of a use patent for Lilly's antidepressant Prozac(R) (fluoxetine
hydrochloride) to treat disturbances of appetite and mood associated with
premenstrual syndrome. Lilly paid the Company an up-front license fee of
$1,000,000, which was recorded as license fee revenue in fiscal 1997, and is
required to make additional payments based upon achievement of development and
regulatory related milestones and pay royalties based upon net sales.

Bristol-Myers Squibb: Intercardia acquired CPEC (see Note M), which holds an
exclusive worldwide license to bucindolol, for use in the treatment of
congestive heart failure, which CPEC acquired from Bristol-Myers Squibb Company
("BMS"). Royalties will be due to BMS based upon net sales of the product.

Merck: In July 1997, Transcell and Interneuron entered into a Research
Collaboration and Licensing Agreement with Merck & Co., Inc. ("Merck") to
discover and commercialize certain novel antibacterial agents. Merck has an
option to extend the field of the collaboration and license to include all
antibacterial pharmaceutical products. Merck made initial payments totaling
$2,500,000 of which $1,500,000 was recognized as license fee revenue in fiscal
1997 and $1,000,000 is being recognized as license fee revenue ratably over the
estimated twelve month option period commencing in July 1997. Additionally,
Merck will provide research support for the first two years of the agreement and
make payments based upon achievement of certain defined clinical development and
regulatory milestones and pay royalties based upon net sales of products
resulting from the collaboration. Certain of the rights licensed to Merck are
based on exclusive licenses or rights held by Transcell and Interneuron from
Princeton University, which will be entitled to varying percentages of certain
payments and royalties received from Merck.

Astra Merck: In December 1995, Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck, Inc. ("Astra Merck") to provide for the development, commercialization
and marketing in the U.S. of a twice-daily formulation of bucindolol for the
treatment of congestive heart failure. Intercardia received $5,000,000 upon
execution of the Astra Merck Collaboration, which was recognized as contract and
license fee revenue in the first quarter of fiscal 1996, and may receive
additional payments based upon achievement of certain milestones and royalties
based on net sales of bucindolol in the U.S. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997, which has been accrued as a liability at
September 30, 1997, and to reimburse Astra Merck for one-third of certain
product launch costs, up to a total of $11,000,000. In the event Intercardia
elects not to make these payments, future royalties payable by Astra Merck to
Intercardia will be substantially reduced. The Astra Merck Collaboration
continues in effect until December 31, 2010, subject to Astra Merck's option to
extend it for two additional five-year periods. During the fiscal years ended
September 30, 1997 and 1996,

                                      F-22

<PAGE>

the Company recognized contract revenue of approximately $553,000 and
$5,000,000, respectively, from payments made by Astra Merck to Intercardia.
During the fiscal years ended September 30, 1997 and 1996, Astra Merck assumed
additional liabilities of approximately $5,505,000 and $4,301,000, respectively,
on Intercardia's behalf. These additional amounts did not impact the Company's
Consolidated Statements of Operations, as they were offset against related
expenses. As of September 30, 1997, the Company's Consolidated Balance Sheet
included approximately $903,000 of accounts receivable due from Astra Merck and
approximately $813,000 of accrued expenses related to obligations assumed by
Astra Merck.

Knoll: In December 1996, Intercardia entered into an agreement with BASF
Pharma/Knoll AG ("Knoll") ("the Knoll Collaboration") to provide for the
development, manufacture and marketing of bucindolol in all countries with the
exception of the United States and Japan (the "Territory"). The Knoll
Collaboration relates to both the twice-daily bucindolol formulation and the
once-a-day bucindolol formulation currently under development. Under the terms
of the Knoll Collaboration, Knoll made up-front payments to CPEC (see Note M)
totaling $3,143,000 which were recognized as contract and license fee revenue in
fiscal 1997. Knoll will make future payments to CPEC contingent upon the
achievement of product approval and sales milestones.

Knoll and Intercardia agreed to share the development and marketing costs of
bucindolol in the Territory. In general, Knoll agreed to pay approximately 60%
of certain development and marketing costs prior to product launch and
Intercardia agreed to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. CPEC will be entitled to a royalty equal to 40% of
net profits, as defined in the Knoll Collaboration, and would be responsible
for, 40% of any net loss, as defined. Knoll also agreed to pay approximately 60%
of once-a-day formulation development costs that relate solely to the Territory
and approximately one-third that have worldwide benefit.

Chiron: In April 1995, Progenitor entered into an agreement with Chiron
Corporation ("Chiron") to collaborate in the development and commercialization
of Progenitor's proprietary gene therapy technology. Progenitor received an
initial payment of $2,500,000 in April 1995 and paid $750,000 for certain
start-up manufacturing costs to Chiron during fiscal 1995 and 1996. These
amounts were recognized as contract revenue and research and development
expense, respectively, in the year ended September 30,1995. Progenitor received
an additional $500,000 payment in January 1996, which was recognized as contract
revenue in fiscal 1996.

M.  Acquisitions:

In September 1994, Intercardia acquired 80% of the outstanding common stock of
CPEC. CPEC has an exclusive worldwide license in North America and Europe to
bucindolol, a non-selective beta-blocker currently under development for
congestive heart failure. Bucindolol began a Phase 3 clinical trial, the
Beta-blocker Evaluation of Survival Trial (the "BEST Study"), for treatment of
congestive heart failure in cooperation with the National Institutes of Health
(the "NIH") and The Department of Veteran Affairs (the "VA") in April 1995. The
NIH and VA have agreed to provide up to $15,750,000 throughout the study and
CPEC is obligated to provide up to an additional



                                      F-23

<PAGE>

$2,000,000, of which $1,750,000 has been paid through September 30, 1997, and
fund other costs of the study including drug supply and clinical monitoring.

The purchase price of CPEC was approximately $1,852,000 comprised of 170,000
shares of Common Stock of the Company, payments to stockholders of CPEC, assumed
liabilities, and other related expenses. Additionally, future issuances of
Interneuron's Common Stock are required upon achieving bucindolol-related
milestones of filing an NDA and receiving an approval letter from the FDA. The
value of these additional shares is not included in the purchase price because
their issuance is contingent upon achieving these milestones. Substantially all
of the purchase price was allocated to the bucindolol technology rights.
However, because bucindolol was not a currently commercializable product at the
time of acquisition and future benefits are dependent upon successful completion
of clinical trials and FDA approval, the Company recorded a charge to operations
for the costs associated with this transaction. Future issuances of Common Stock
will result in additional charges.

In January 1996, the Company acquired the 20% outstanding capital stock of CPEC
not owned by Intercardia by issuing an aggregate of 342,792 shares of Common
Stock to the former CPEC minority stockholders and recorded a charge for the
purchase of in-process research and development of approximately $6,084,000 in
fiscal 1996.

In December 1995, InterNutria acquired from AVAX, the technology and know-how to
produce a specially-formulated dietary supplement for women's use during their
pre-menstrual period, later named PMS Escape, in exchange for $2,400,000 payable
in two installments of Interneuron Common Stock. The first payment consisted of
55,422 shares and was made in fiscal 1997 and the second payment will be made in
late calendar 1997 at the then-prevailing market price. Certain affiliates of
the Company are or were stockholders of AVAX but will not receive any of the
purchase price. The Company recorded a charge of approximately $2,150,000 in
fiscal 1996 in connection with this transaction for the purchase of in-process
research and development as the future benefits from this technology depended
upon the successful completion of certain clinical trials.

N.   Subsidiaries:

Intercardia:

In February 1996, Intercardia completed an initial public offering of 2,530,000
shares of Intercardia common stock at $15.00 per share resulting in proceeds,
net of offering costs, of approximately $35,000,000 (the "Intercardia IPO"). The
Company purchased 333,333 shares of the Intercardia IPO for approximately
$5,000,000. The Company's ownership of Intercardia's outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% as a
result of the Intercardia IPO, without giving effect to exercise of options and
warrants. In certain circumstances, the Company has the right to purchase
additional shares of Intercardia common stock at fair market value to provide
that the Company's equity ownership in Intercardia does not fall below 51%. As a
result of the Intercardia IPO, Put Protection Rights that could have caused the
Company to issue in June 1998 up to approximately 1,914,000 shares of Common
Stock expired. As a result of the



                                      F-24

<PAGE>

Intercardia IPO, the Company recognized a gain on its investment in Intercardia
of approximately $16,350,000 which has been recorded as an increase to the
Company's Additional paid-in capital.

In February 1997, the Company announced that its Board of Directors had
authorized it to purchase from time to time through open-market transactions up
to 200,000 shares of the common stock of Intercardia. As of September 30, 1997,
the Company had purchased 129,400 shares of Intercardia common stock, for an
aggregate purchase price of approximately $2,951,000, of which approximately
$2,234,000 was recorded as purchase of in-process research and development in
fiscal 1997. As a result of these purchases, the Company's ownership of
Intercardia increased from approximately 60% at September 30, 1996 to
approximately 61% at September 30, 1997 based upon the number of outstanding
shares of Intercardia at such dates.

Progenitor:

In August 1997, Progenitor completed an initial public offering (the "Progenitor
IPO") of 2,750,000 units, plus an additional 125,000 units resulting from a
partial exercise of the underwriters' over allotment option, at $7.00 per unit,
each unit consisting of one share of Progenitor common stock and one five-year
warrant to purchase one share of Progenitor common stock at $10.50 per share.
The Progenitor IPO resulted in proceeds to Progenitor, net of offering-related
costs, of approximately $17,200,000. Interneuron purchased 500,000 units of the
Progenitor IPO for a total of $3,500,000. Concurrent with the Progenitor IPO,
Progenitor sold 1,023,256 shares of Progenitor common stock to Amgen pursuant to
a stock purchase agreement for a purchase price of $4,500,000 in cash and a
$1,000,000 promissory note. Concurrent with the closing of the Progenitor IPO,
Progenitor acquired Mercator Genetics, Inc. ("Mercator") (the "Mercator
Acquisition") for an aggregate purchase price of approximately $24,000,000,
including related transaction costs, paid with the issuance of approximately
3,443,000 shares of Progenitor common stock, plus the assumption of Mercator
liabilities, forgiveness of debt relating to advances made by Progenitor to
Mercator and the issuance of stock options and warrants. As a result of the
Progenitor IPO, Put Protection Rights that could have caused the company to
issue in June 1998 up to approximately 1,949,000 shares of the Company's Common
Stock expired. Interneuron's ownership in Progenitor's outstanding capital stock
decreased from approximately 76% at September 30, 1996 to approximately 37% at
September 30, 1997 principally due to the Progenitor IPO and the Mercator
Acquisition. As a result of the Company's decreased percentage of ownership in
Progenitor, as of the date of the Progenitor IPO and Mercator acquisition, the
Company ceased consolidating the financial statements of Progenitor and
commenced including Progenitor in the Company's financial statements using the
equity method of accounting.

In connection with the Mercator Acquisition, Progenitor has incurred
non-recurring charges to operations in fiscal 1997 related to the purchase of
in-process research and development. Interneuron included approximately
$7,800,000 of these charges in equity in net loss of unconsolidated subsidiary
based on the Company's ownership interest in Progenitor. As a result of the
Progenitor IPO, Interneuron recognized a gain on its investment in Progenitor of
approximately $7,291,000 which has been recorded as an increase in the Company's
additional paid-in capital.




                                      F-25

<PAGE>

Interneuron may from time to time purchase through open-market transactions
Progenitor common stock or warrants. As of September 30, 1997, the Company has
purchased 20,000 shares of Progenitor common stock for approximately $105,000.
At September 30, 1997, the Company's investment in Progenitor is reflected in
investment in unconsolidated subsidiary at $4,040,000 and the market value of
the Company's holdings of Progenitor securities was approximately $23,600,000,
based upon the September 30, 1997 closing prices of Progenitor common stock and
warrants. Based upon the closing prices of Progenitor's common stock and
warrants on December 23, 1997, the market value of the Company's holdings of
Progenitor securities was approximately $10,800,000. Such securities are subject
to regulatory and contractual restrictions on resale and on the liquidity of the
market for Progenitor's securities and, accordingly, the market value of such
securities as of a given date is not necessarily indicative of their ultimate
value to Interneuron.

In July 1997, the Company relinquished certain conversion price adjustment
rights relating to Progenitor Series A Preferred Stock held by the Company in
exchange for an option to acquire an exclusive, worldwide license to
manufacture, use and sell certain aspects of Del-1, a novel cell surface protein
encoded by the del-1 gene which was discovered by Progenitor.

For the period during which the Company accounted for its investment in
Progenitor using the equity method of accounting, Progenitor reported a net loss
of approximately $25,019,000, which includes a one-time charge for acquired
in-process research and development related to the Mercator acquisition. The
Company reported equity in Progenitor's net losses of approximately $9,028,000
for the period from the Progenitor IPO to September 30, 1997. Following are
condensed statements of operations and balance sheet data of Progenitor:

<TABLE>
<CAPTION>
                                                              Years ended September 30,
                                                  ----------------------------------------------
                                                       1997             1996            1995
                                                  --------------   --------------   ------------
<S>                                              <C>                <C>             <C>  
Statement of Operations:
Revenues                                          $  1,142,000       $1,332,000       $2,821,000
Charge for acquired in-process 
        research and development                    21,092,000                -                -
Net loss                                           (30,283,000)      (5,484,000)      (2,875,000)
</TABLE>

<TABLE>
<CAPTION>
                                                           September 30,
                                                  ------------------------------
                                                       1997             1996
                                                  --------------   -------------
<S>                                               <C>              <C>  
Balance Sheet:
Current assets                                     $20,224,000       $  319,000
Noncurrent assets                                    3,361,000          601,000
Current liabilities                                  6,703,000        2,074,000
Noncurrent liabilities                                 942,000        4,010,000

</TABLE>
Transcell:

The Company's percentage ownership of Transcell was approximately 79% at
September 30, 1997 and 1996.


                                      F-26

<PAGE>

O.  Subsequent Events:

Proposed Sale of Transcell to Intercardia: In November 1997, the Company entered
into a letter of intent relating to the proposed acquisition by Intercardia of
Transcell and related technology owned by Interneuron in exchange for
Intercardia common stock with an aggregate current market value of approximately
$15,000,000. In addition, Intercardia will issue Intercardia stock options to
Transcell employees and consultants with a current market value of approximately
$3,000,000 to $4,000,000. The transaction is subject to final due diligence and
approval by Transcell's and Intercardia's stockholders.

Under the terms of the letter of intent, Transcell stockholders will receive
Intercardia common stock in three installments with an aggregate current market
value of approximately $12 million. The first installment, representing
approximately $6 million at Intercardia's current stock price, will be made upon
closing the transaction, currently estimated to occur in the first calendar
quarter of 1998. The number of Intercardia shares to be received by Transcell
stockholders at closing will be determined by Intercardia's stock price during
the week prior to closing. The minimum Intercardia stock price to be used for
determining the number of shares received for the first installment will be $19
per share and the maximum will be $25 per share. The second and third
installments will each consist of approximately $3 million of Intercardia common
stock, as valued at each date, and will be issued 15 and 21 months after the
first closing.

In exchange for certain license and technology rights owned by Interneuron, and
for Interneuron's continuing guarantee of certain of Transcell's lease
obligations, Intercardia will issue to Interneuron $3,000,000 of Intercardia
common stock (subject to the price range described above) at the first closing
and will pay Interneuron a royalty on certain products that may result from a
research collaboration originally entered into among Transcell, Interneuron and
Merck.

At closing, Intercardia and Interneuron expect to incur charges to operations
currently estimated to be approximately $6,000,000 to $8,000,000 as a result of
the transaction and will incur additional future charges relating to certain
stock options to be issued pursuant to the transaction. The Company will
allocate a portion of such charges to minority interest.

1997 Equity Incentive Plan: As an integral component of a management and
employee retention program designed to motivate, retain and provide incentive to
the Company's management and other employees, the Board of Directors authorized
and, pursuant to Board authorization, the Compensation Committee approved the
1997 Equity Incentive Plan in November 1997 (the "1997 Plan"). The 1997 Plan
provides for the grant of Restricted Stock Awards which entitle the plan
participants to receive up to an aggregate of 1,750,000 shares (the "Shares") of
the Company's Common Stock upon satisfaction of specified vesting periods, in
consideration of services rendered to the Company or such other consideration as
the Board of Directors or the Compensation Committee of the board may determine.
The Shares may be sold by the plan participants immediately upon vesting of the
Shares.


                                      F-27

<PAGE>

Restricted Stock Awards to acquire an aggregate of 1,328,704 Shares have been
granted to all employees of the Company in consideration of services rendered by
the employee to the Company. The balance of 421,296 Shares are reserved for
future grants of Restricted Stock Awards to individuals who are not currently
executive officers of the Company. The number of Shares subject to each
employee's award were based primarily on the employee's base compensation.
Vesting of these shares commences in January 1998 and extends through May 2000.

The Company will incur compensation expense over the vesting period of shares
subject to Restricted Stock Awards. The charges relating to the 1,328,704 shares
subject to the outstanding Restricted Stock Awards are expected to aggregate
approximately $15,500,000, of which approximately $11,000,000 is expected to be
incurred in the fiscal year ending September 30, 1998 and the remainder through
fiscal 2000.


                                      F-28

ITEM 14(d)   FINANCIAL STATEMENTS OF PROGENITOR, INC.



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
<S>                                                                                <C>
Report of Independent Accountants...............................................   S-2

Consolidated Balance Sheets as of September 30, 1997 and 1996...................   S-3

Consolidated Statements of Operations for the years ended September 30, 1997,
1996, and 1995, and for the period from May 8, 1992 (Date of Inception) to
September 30, 1997..............................................................   S-4

Consolidated Statements of Cash Flows for the years ended September 30, 1997,
1996, and 1995, and for the period from May 8, 1992 (Date of Inception) to
September 30, 1997..............................................................   S-5

Consolidated Statement of Stockholders' Equity (Deficit) for the period from
May 8, 1992 (Date of Inception) through September 30, 1997......................   S-6

Notes to Consolidated Financial Statements......................................   S-7
</TABLE>


                                      S-1


<PAGE>   
                        REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders of Progenitor, Inc.:

We have audited the accompanying consolidated balance sheets of Progenitor, Inc.
and Subsidiary (a Development Stage Company) as of September 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended September 30, 1997, 1996 and 1995,
and for the period from May 8, 1992 (date of inception) to September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Progenitor, Inc. and Subsidiary (a Development Stage Company) as of September
30, 1997 and 1996, and the consolidated results of operations and cash flows for
the years ended September 30, 1997, 1996 and 1995, and for the period from May
8, 1992 (date of inception) to September 30, 1997, in conformity with generally
accepted accounting principles.

                                                 COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 4, 1997


                                      S-2


<PAGE>   
                                PROGENITOR, INC.
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,
                                                                                 ----------------------------
                                                                                     1997            1996
                                                                                 ------------    ------------
<S>                                                                              <C>             <C>         
ASSETS
Current assets:
    Cash and cash equivalents                                                    $ 19,673,252    $     22,315
    Accounts receivable                                                               129,699         175,498
    Prepaid expenses and other current assets                                         421,411         120,827
                                                                                 ------------    ------------
        Total current assets                                                       20,224,362         318,640
                                                                                 ------------    ------------

Property and equipment, at cost:
    Equipment                                                                       3,095,469       1,216,219
    Leasehold improvements                                                             72,387              --
                                                                                 ------------    ------------
                                                                                    3,167,856       1,216,219
        Less accumulated depreciation                                              (1,248,895)       (674,847)
                                                                                 ------------    ------------
                                                                                    1,918,961         541,372

Notes receivable-employees, net                                                       480,208          59,645
Intangible assets, net of accumulated amortization of $38,477                         961,390              --
                                                                                 ------------    ------------
        Total assets                                                             $ 23,584,921    $    919,657
                                                                                 ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable                                                             $  1,792,827    $    446,915
    Accrued expenses                                                                4,148,372       1,361,615
    Capital lease obligations - current                                               761,929         265,155
                                                                                 ------------    ------------
        Total current liabilities                                                   6,703,128       2,073,685
                                                                                 ------------    ------------

Note payable - related party                                                               --       3,443,050
Convertible debenture - related party                                                      --         475,677
Capital lease obligations                                                             941,696          91,706
                                                                                 ------------    ------------
        Total liabilities                                                           7,644,824       6,084,118

Commitments and contingencies

Stockholders' equity (deficit):
    Preferred stock, $.01 par value, authorized 5,000,000 and 3,000,000 shares
      at September 30, 1997 and 1996, respectively:
           Series A, 2,020,496 issued and outstanding as of                                --          20,205
           September 30, 1996
           Series B, 349,000 issued and outstanding as of September                        --           3,490
           30, 1996
    Common stock, Class A, $.001 par value:  39,000,000 shares                         13,405           2,886
     authorized; 13,405,333 and 2,885,904 shares issued and
     outstanding as of September 30, 1997 and 1996, respectively
    Stock subscription promissory note receivable                                  (1,000,000)             --
    Additional paid-in capital                                                     79,650,550      14,966,792
    Deficit accumulated during development stage                                  (62,723,858)    (20,157,834)
                                                                                 ------------    ------------
        Total stockholders' equity (deficit)                                       15,940,097      (5,164,461)
                                                                                 ------------    ------------
        Total liabilities and stockholders' equity (deficit)                     $ 23,584,921    $    919,657
                                                                                 ============    ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                    
                                      S-3

<PAGE>   
                                PROGENITOR, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                              MAY 8, 1992
                                                                                                (DATE OF   
                                                            YEAR ENDED SEPTEMBER 30,           INCEPTION)
                                               --------------------------------------------  TO SEPTEMBER 30,
                                                   1997            1996           1995            1997
                                               ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>            <C>         
Revenues                                       $  1,141,649    $  1,332,366    $  2,821,386    $  5,295,401
Operating expenses:
    Research and development                      5,462,755       3,872,891       4,227,959      21,567,545
    Write-off of acquired in-process             21,092,000              --              --      21,092,000
     research and development
    General and administrative                    2,880,458       1,791,050       1,116,652       8,666,941
    Nonrecurring expenses                         1,506,563              --              --       1,506,563
                                               ------------    ------------    ------------    ------------
        Total operating expenses                 30,941,776       5,663,941       5,344,611      52,833,049
                                               ------------    ------------    ------------    ------------

        Loss from operations                    (29,800,127)     (4,331,575)     (2,523,225)    (47,537,648)

Nonrecurring expense                                     --        (973,525)             --        (973,525)
Interest and other income                           255,292              --              --         255,292
Interest expense - related party                   (659,531)       (119,617)       (289,297)     (1,940,030)
Interest expense - other                            (78,177)        (59,087)        (62,945)       (244,466)
                                               ------------    ------------    ------------    ------------
        Net loss                               $(30,282,543)   $ (5,483,804)   $ (2,875,467)   $(50,440,377)
                                                                                               ============

        Preferred stock dividend                (12,283,481)             --              --
                                               ------------    ------------    ------------

        Net loss applicable to common stock    $(42,566,024)   $ (5,483,804)   $ (2,875,467)
                                               ============    ============    ============ 

Net loss per common share                      $     ($9.82)   $      (1.92)   $      (1.02)
                                               ============    ============    ============ 

Shares used in computing net loss per common
    share                                         4,333,383       2,863,210       2,810,853
                                               ============    ============    ============ 
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                    
                                      S-4

<PAGE>   
                                PROGENITOR, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                    MAY 8, 1992
                                                                                                     (DATE OF
                                                             YEAR ENDED SEPTEMBER 30,              INCEPTION) TO
                                                   --------------------------------------------    SEPTEMBER 30,
                                                       1997            1996            1995           1997
                                                   ------------    ------------    ------------    ------------ 
<S>                                                <C>             <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                           $(30,282,543)   $ (5,483,804)   $ (2,875,467)   $(50,440,377)

Adjustments to reconcile net loss to net
cash used in operating activities:
    Depreciation and amortization                       828,541         292,086         262,263       1,870,295
    Gain on sale of equipment                                --         (23,247)             --         (23,247)
    Noncash expense for anti-dilution stock
      issuances                                         386,463              --         376,680         763,143
    Write-off of acquired in-process                 21,092,000              --              --      21,092,000
      research and development
    Changes in operating assets and liabilities:
        Accounts receivable                              45,799          18,400        (193,898)       (129,699)
        Accounts receivable - related party                  --         131,600        (131,600)             --
        Notes receivable - employees, net              (351,813)        159,089         (16,638)       (411,458)
        Prepaid expenses and other current              (50,759)        (98,209)        (19,618)       (171,586)
        assets
        Accounts payable                             (1,142,759)         87,998          59,490        (822,105)
        Accrued expenses                              1,076,061          17,897         664,324       2,437,676
        Accrued interest - related party                659,589         119,617         261,350       1,912,141
                                                   ------------    ------------    ------------    ------------ 
     Cash used in operating activities               (7,739,421)     (4,778,573)     (1,613,114)    (23,923,217)
                                                   ------------    ------------    ------------    ------------ 

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                     (923,288)        (83,467)       (154,814)     (2,410,905)
Proceeds from sale of equipment                              --          54,000              --          54,000
Advances under convertible bridge promissory
   note                                              (3,769,519)             --              --      (3,769,519)
Cash paid in purchase of Mercator                      (762,937)             --              --        (762,937)
                                                   ------------    ------------    ------------    ------------ 
    Cash used in investing activities                (5,455,744)        (29,467)       (154,814)     (6,889,361)
                                                   ------------    ------------    ------------    ------------ 

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from note payable - related party           5,697,469       3,362,369       1,041,972      20,555,003
 Proceeds from convertible debenture -
   related party                                             --              --         436,740         436,740
 Proceeds from bridge loan - related party            3,665,029              --              --       3,665,029
 Proceeds from issuance of stock, net                23,006,585         420,250       1,560,431      24,995,179
 Proceeds from capital lease financings                 826,673         117,325          87,771       1,694,371
 Principal payments on capital lease
   financings                                          (349,654)       (243,332)       (194,787)       (860,492)
                                                   ------------    ------------    ------------    ------------ 
    Cash provided by financing activities            32,846,102       3,656,612       2,932,127      50,485,830
                                                   ------------    ------------    ------------    ------------ 
    Net increase (decrease) in cash and cash
      equivalents                                    19,650,937      (1,151,428)      1,164,199      19,673,252
Cash and cash equivalents, beginning of
period                                                   22,315       1,173,743           9,544              --
                                                   ------------    ------------    ------------    ------------ 
    Cash and cash equivalents, end of period       $ 19,673,252    $     22,315    $  1,173,743    $ 19,673,252
                                                   ============    ============    ============    ============ 
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      S-5


<PAGE>   
                                PROGENITOR, INC.
                          (A Development Stage Company)
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
           From May 8, 1992 (Date of Inception) To September 30, 1997


<TABLE>
<CAPTION>
                                                                   PREFERRED STOCK  
                                              --------------------------------------------------------
                                                     SERIES A                       SERIES B
                                              -------------------------     --------------------------
                                               SHARES         AMOUNT          SHARES         AMOUNT
                                              ---------    ------------     ----------   -------------
<S>                                           <C>          <C>              <C>          <C>
Balance, May 8, 1992 (date of inception)
  Issued in May 1992 at $.002 per share              --              --             --             -- 
  Issued in May 1992 at $.001 per  share             --              --             --             -- 
  Issued in December 1992 and
    January 1993 at $.000 per
    share under anti-dilution
    provisions                                       --              --             --             -- 
  Issued in December 1992 and
    January 1993 at $.02 per share                   --              --             --             -- 
  Repurchased at $.02 per share                      --              --             --             -- 
  Cumulative net loss (May 8,
    1992 through September 30, 1994)                 --              --             --             -- 
                                              -------------------------------------------------------
Balance, September 30, 1994                          --              --             --             -- 
                                              -------------------------------------------------------
  Issued preferred stock at $6.25
    for conversion of debt to
    equity                                    2,020,496    $     20,205             --             -- 
  Conversion of Class B common to
    Class A common under
    anti-dilution provisions                         --              --             --             -- 
  Issued in December 1994 at
    $.000 per share under
    anti-dilution provisions                         --              --             --             -- 
  Stock options exercised at $.20
    per share                                        --              --             --             -- 
  Issued preferred stock in
    December-April at $4.47 per
    share, net of offering costs                     --              --        349,000   $      3,490
  Net loss                                               
                                              -------------------------------------------------------
Balance, September 30, 1995                   2,020,496          20,205        349,000          3,490
                                              -------------------------------------------------------
  Stock options exercised at
    $.20-$6.00 per share                             --              --             --             -- 
  Issued common stock in February
    1996 at $6.00 per share                          --              --             --             -- 
  Net loss                                           --              --             --             -- 
</TABLE>


<TABLE>
<CAPTION>
                                                                     COMMON STOCK
                                              -----------------------------------------------------    SHAREHOLDER
                                                       CLASS A                        CLASS B          PROMISSORY 
                                              -------------------------        --------------------       NOTE       
                                                SHARES        AMOUNT            SHARES      AMOUNT     RECEIVABLE 
                                              ---------    ------------        --------   ---------    ----------
<S>                                           <C>          <C>                  <C>       <C>          <C>
Balance, May 8, 1992 (date of  inception)
  Issued in May 1992 at $.002 per share       2,412,950    $      2,413              --          --         -- 
  Issued in May 1992 at $.001 per  share             --              --         250,000   $     250         -- 
  Issued in December 1992 and
    January 1993 at $.000 per
    share under anti-dilution
    provisions                                   13,397              13              --          --         -- 
  Issued in December 1992 and
    January 1993 at $.02 per share              216,588             217              --          --         -- 
  Repurchased at $.02 per share                 (74,267)            (74)             --          --         -- 
  Cumulative net loss (May 8,
    1992 through September 30, 1994)                 --              --              --          --         -- 

                                              -------------------------------------------------------------------
Balance, September 30, 1994                   2,568,668           2,569         250,000         250         -- 
                                              -------------------------------------------------------------------
  Issued preferred stock at $6.25
    for conversion of debt to
    equity                                           --              --              --          --         -- 
  Conversion of Class B common to
    Class A common under
    anti-dilution provisions                    178,750             179         250,000        (250)        -- 
  Issued in December 1994 at
    $.000 per share under
    anti-dilution provisions                     40,353              40              --          --         -- 
  Stock options exercised at $.20
    per share                                     1,500               1              --          --         -- 
  Issued preferred stock in
    December-April at $4.47 per
    share, net of offering costs                     --              --              --          --         -- 
  Net loss                              
                                              -------------------------------------------------------------------
Balance, September 30, 1995                   2,789,271           2,789              --          --         -- 
                                              -------------------------------------------------------------------
  Stock options exercised at
    $.20-$6.00 per share                         38,300              39              --          --         -- 
  Issued common stock in February
    1996 at $6.00 per share                      58,333              58              --          --         -- 
  Net loss                                           --              --              --          --         -- 
</TABLE>



<TABLE>
<CAPTION>
                                                              DEFICIT  
                                                           ACCUMULATED
                                            ADDITIONAL        DURING       
                                             PAID-IN       DEVELOPMENT
                                             CAPITAL          STAGE            TOTAL    
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Balance, May 8, 1992 (date of inception)
  Issued in May 1992 at $.002 per share    $      2,413              --    $      4,826
  Issued in May 1992 at $.001 per  share             --              --             250
  Issued in December 1992 and
    January 1993 at $.000 per
    share under anti-dilution
    provisions                                      (13)             --              --
  Issued in December 1992 and
    January 1993 at $.02 per share                4,105              --           4,322
  Repurchased at $.02 per share                  (1,411)             --          (1,485)
  Cumulative net loss (May 8,
    1992 through September 30, 1994)                 --    $(11,798,563)    (11,798,563)
                                            -------------------------------------------
Balance, September 30, 1994                       5,094     (11,798,563)    (11,790,650)
                                            -------------------------------------------
  Issued preferred stock at $6.25
    for conversion of debt to
    equity                                   12,607,895              --      12,628,100
  Conversion of Class B common to
    Class A common under
    anti-dilution provisions                    161,751              --         161,680
  Issued in December 1994 at
    $.000 per share under
    anti-dilution provisions                    214,960              --         215,000
  Stock options exercised at $.20
    per share                                       299              --             300
  Issued preferred stock in
    December-April at $4.47 per
    share, net of offering costs              1,556,641              --       1,560,131
  Net loss                                           --      (2,875,467)     (2,875,467)
                                            -------------------------------------------
Balance, September 30, 1995                  14,546,640     (14,674,030)       (100,906)
                                            -------------------------------------------
  Stock options exercised at
    $.20-$6.00 per share                         70,212              --          70,251
  Issued common stock in February
    1996 at $6.00 per share                     349,940              --         349,998
  Net loss                                           --      (5,483,804)     (5,483,804)
</TABLE>


                                      S-6


<PAGE>   
                                PROGENITOR, INC.
                          (A Development Stage Company)
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
           From May 8, 1992 (Date of Inception) To September 30, 1997

<TABLE>
<CAPTION>
                                                           PREFERRED STOCK
                                      -----------------------------------------------------------
                                                 SERIES A                        SERIES B
                                      --------------------------         ------------------------
                                         SHARES           AMOUNT         SHARES            AMOUNT
                                      ----------          ------         -------           ------
<S>                                    <C>                <C>            <C>               <C>  
                                      -----------------------------------------------------------
Balance, September 30, 1996            2,020,496          20,205         349,000           3,490
                                      -----------------------------------------------------------
  Issuance of stock in February
    1997 at $4.00-$5.50 per share             --              --              --              -- 
  Issuance of Units in Offering               --              --              --              -- 
  Issuance to underwriters to
    cover overallotment                       --              --              --              -- 
  Issuance of common stock in
    Mercator Acquisition                      --              --              --              -- 
  Forgiveness of debt by
    Interneuron                               --              --              --              -- 
  Conversion of preferred stock
    series A to common stock          (2,020,496)        (20,205)             --              -- 
  Conversion of preferred stock
    series B to common stock                  --              --        (349,000)         (3,490)
  Issuance of stock upon exercise
    of warrants-Ohio University               --              --              --              -- 
  Issuance of stock to Ohio
    University under
    anti-dilution provisions                  --              --              --              -- 
  Issuance of common stock to
    Amgen                                     --              --              --              -- 
  Issuance of common stock in
    August - September at
    $.20-$.68 per share upon
    exercise of options                       --              --              --              -- 
  Preferred stock dividend                    --              --              --              -- 
  Net loss                                    --              --              --              -- 
Balance, September 30, 1997                   --              --              --              -- 
</TABLE>


<TABLE>
<CAPTION>
                                                                                                  SHAREHOLDER   
                                                            COMMON STOCK                          PROMISSORY 
                                      -------------------------------------------------------
                                               CLASS A                     CLASS B                   NOTE       
                                      -------------------------     -------------------------
                                        SHARES        AMOUNT          SHARES        AMOUNT        RECEIVABLE 
                                      ----------    -----------     ----------     ----------    ------------
<S>                                    <C>          <C>             <C>            <C>           <C>             
                                      -----------------------------------------------------------------------
Balance, September 30, 1996            2,885,904          2,886             --             --              -- 
                                      -----------------------------------------------------------------------
  Issuance of stock in February
    1997 at $4.00-$5.50 per share          1,313              2             --             --              -- 
  Issuance of Units in Offering        2,750,000          2,750             --             --              -- 
  Issuance to underwriters to
    cover overallotment                  125,000            125             --             --              -- 
  Issuance of common stock in
    Mercator Acquisition               3,442,814          3,443             --             --              -- 
  Forgiveness of debt by
    Interneuron                               --             --             --             --              -- 
  Conversion of preferred stock
    series A to common stock           2,349,414          2,349             --             --              -- 
  Conversion of preferred stock
    series B to common stock             725,393            725             --             --              -- 
  Issuance of stock upon exercise
    of warrants-Ohio University           25,000             25             --             --              -- 
  Issuance of stock to Ohio
    University under
    anti-dilution provisions              71,900             72             --             --              -- 
  Issuance of common stock to
    Amgen                              1,023,256          1,023             --             --      (1,000,000)
  Issuance of common stock in
    August - September at
    $.20-$.68 per share upon
    exercise of options                    5,339              5             --             --              -- 
  Preferred stock dividend                    --             --             --             --              --
  Net loss                                    --             --             --             --              -- 
                                      -----------------------------------------------------------------------
Balance, September 30, 1997           13,405,333   $     13,405             --             --    $ (1,000,000)
                                      =======================================================================
</TABLE>



<TABLE>
<CAPTION>
                                                      DEFICIT
                                                    ACCUMULATED
                                      ADDITIONAL      DURING
                                       PAID-IN      DEVELOPMENT
                                       CAPITAL        STAGE            TOTAL
                                    ------------    -----------      ---------- 
<S>                                   <C>           <C>              <C>        
                                    -------------------------------------------
Balance, September 30, 1996           14,966,792    (20,157,834)     (5,164,461)
                                    -------------------------------------------
  Issuance of stock in February
    1997 at $4.00-$5.50 per share          5,529             --           5,531
  Issuance of Units in Offering       16,355,740             --      16,358,490
  Issuance to underwriters to
    cover overallotment                  813,625             --         813,750
  Issuance of common stock in
    Mercator Acquisition              15,396,557             --      15,400,000
  Forgiveness of debt by
    Interneuron                       13,940,814                     13,940,814
  Conversion of preferred stock
    series A to common stock              17,856             --              --
  Conversion of preferred stock
    series B to common stock               2,765             --              --
  Issuance of stock upon exercise
    of warrants-Ohio University           67,225             --          67,250
  Issuance of stock to Ohio
    University under
    anti-dilution provisions             386,391             --         386,463
  Issuance of common stock to
    Amgen                              5,411,991             --       4,413,014
  Issuance of common stock in
    August - September at
    $.20-$.68 per share upon
    exercise of options                    1,784             --           1,789
                                      12,283,481    (12,283,481)
  Net loss                                    --    (30,282,543)    (30,282,543)
                                    -------------------------------------------
Balance, September 30, 1997         $ 79,650,550   $(62,723,858)   $ 15,940,097
                                    ===========================================
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements


                                      S-7


<PAGE>   
                                PROGENITOR, INC.
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


        1.     Organization and Summary of Significant Accounting Policies:

               a. Organization: Progenitor, Inc. (together with Subsidiary, the
"Company"), a Delaware Corporation, is engaged in the discovery and functional
characterization of genes to identify therapeutic leads and targets for the
development of new pharmaceuticals. Significant additional research and
development activities, clinical testing, and regulatory approvals must be
completed before commercial sales, if any, of the Company's product will
commence. The Company is actively pursuing research and development grants and
negotiating equity and corporate partnership arrangements to fund its research
and development activities. Expenses incurred have been primarily for research
and development activities and administration, resulting in an accumulated
deficit of $62,723,858. The Company is dependent on the proceeds of its
securities offerings and other financing vehicles to continue clinical research
and to fund working capital requirements. If additional funding is unavailable
to the Company when needed, the Company will be required to significantly
curtail one or more of its research and development programs, and the Company's
business and financial condition will be adversely affected.

        Prior to August 12, 1997, the Company was a majority owned subsidiary of
Interneuron Pharmaceuticals, Inc. (Interneuron). Interneuron provided the
initial funding of the Company and had invested $26.6 million in the Company
through debt and equity financing through August 12, 1997.

               b. Basis of Presentation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Mercator Genetics, Inc. ("Mercator"), since August 12, 1997, the date of
acquisition (see Note 2). All intercompany transactions and balances have been
eliminated in consolidation.

               c. Revenue Recognition: The Company recognizes revenue under
strategic alliances as certain agreed upon milestones are achieved or license
fees are earned.

               d. Research and Development Costs: All costs related to research
and development are expensed as incurred.

               e. Reclassification: Certain reclassifications have been made to
the 1996 and 1995 consolidated financial statements to conform to the 1997
presentation.

               f. Cash and Cash Equivalents: Cash and cash equivalents consist
of cash in banks, highly liquid debt instruments and money market funds with
original maturities of three months or less. At September 30, 1997,
approximately $19.7 million of cash and cash equivalents were held in three
financial institutions.

               g. Property and Equipment: Property and equipment is stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets. Equipment leased under capital leases is
amortized using the straight-line method over the lease term. Maintenance and
repairs are charged to expense as incurred, while renewals and improvements are
capitalized. The asset cost and accumulated depreciation is removed for assets
sold or retired, and any resulting gain or loss is reflected in the statement of
operations. Equipment includes $2,349,886 and $865,540 of equipment under
capital leases and accumulated depreciation of $1,008,556 and $516,551 as of
September 30, 1997 and 1996, respectively.

               h. Intangible Assets: Intangible assets at September 30, 1997
include amounts related to goodwill and assembled workforce of approximately
$481,000 and $735,000, respectively. Goodwill represents the excess of the
purchase price over the fair value of the net assets of Mercator and is
amortized on a straight-line basis over ten years. Assembled workforce
represents the estimated cost to recruit and train 37 Mercator employees
retained by the Company and is being amortized on a straight-line basis over two
years. Approximately $216,000 of 


                                      S-8


<PAGE>   

the amount related to assembled workforce was written off as a permanent
impairment loss in September 1997 as a result of employee turnover subsequent to
the date of acquisition. This amount was calculated based on the value allocated
to the individual employees who left immediately following the acquisition.

               i. Stock Split: Effective in August 1997, the Board of Directors
authorized a 1-for-2 reverse stock split on Class A common shares. All
references to Class A common shares, underlying stock options, warrants and per
share data have been restated to reflect the reverse stock split.

               j. Net Loss per Share:

                      Historical

                      Net loss per common share is computed based on the
weighted average number of common shares outstanding during the year. Common
equivalent shares from stock options and warrants are excluded from the
computation as their effect is anti-dilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin, common and common
equivalent shares issued at prices below the initial public offering (the
"Offering") price during the 12 months immediately preceding the filing date of
an Offering have been included in the calculation as if they were outstanding
through the interim period that includes the Offering prospectus, March 31,
1997, (using the treasury stock method and the Offering price of $5.375 per
share).

                      Supplementary

                      Supplementary net loss per common share is computed based
on the historical net loss per share adjusted for the conversion of all
outstanding shares of preferred stock into common stock as if the conversion had
occurred on October 1, 1996. Based on this supplementary net loss per common
share would have been $(6.09) for the year ended September 1997, with a weighted
average number of shares outstanding of 6,986,949.

               k. Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

               l. Future Disclosure Requirements: The Company will adopt SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128"), in the fiscal quarter ending
December 31, 1997. SFAS No. 128 requires the Company to change its method of
computing, presenting and disclosing earnings per share information. Upon
adoption, all prior period data presented will be restated to conform to the
provisions of SFAS No. 128. Management has not determined the effect of adopting
SFAS No. 128.

        The Company will adopt SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.

        2. Acquisition: Effective August 12, 1997, the Company acquired Mercator
for an aggregate purchase price of approximately $23.6 million (the
"Acquisition"). The Acquisition has been accounted for using the purchase
method. The purchase price consideration was comprised of 3,442,814 shares of
common stock, 592,914 options and 56,737 warrants to purchase common stock with
a combined fair value of $15.4 million, $3.8 million of loan forgiveness, $2.6
million of assumed liabilities and $1.9 million of estimated transaction costs.
Prior to the Acquisition, the Company provided bridge loan financing of $3.8
million, including accrued interest of approximately $105,000, to Mercator in
the form of a Convertible Bridge Promissory Note which became part of the
purchase price consideration.


                                      S-9


<PAGE>   
        In connection with the Acquisition the Company wrote off approximately
$21.1 million of acquired in-process research and development which was charged
to operations, because in management's opinion, technological feasibility for
the acquired research and development had not been established and the
technology had no alternative future use. The Company also incurred several
nonrecurring expenses of approximately $1.5 million, including $839,000 for
severance, retention and bonus programs, $350,000 to facilitate employee
relocation and $318,000 for other integration costs.

        The following unaudited pro forma consolidated results of operations
have been prepared as if the Acquisition of Mercator had occurred on October 1,
1995:


<TABLE>
<CAPTION>
                             Year ended            Year ended
                         September 30, 1997     September 30, 1996
                            ------------          ------------
<S>                      <C>                    <C>         
Revenue                     $  1,266,649          $  1,832,377
Net Loss                    $(15,898,101)         $(34,246,991)
Net  loss  applicable  to                      
common stock                $(28,181,582)         $(34,246,991)
Net loss per common share   $      (3.86)         $      (5.43)
</TABLE>


The pro forma net loss applicable to common stock and net loss per share amounts
for fiscal 1996 include the write off of purchased research and development of
$21.1 million, the recognition of an impairment loss on assembled workforce of
$216,000, and amortization expense of approximately $307,000 related to goodwill
and assembled workforce. The pro forma net loss applicable to common stock and
net loss per common share amounts for fiscal 1997 include amortization expense
of approximately $307,000 related to goodwill and assembled workforce. The pro
forma consolidated results do not purport to be indicative of results that would
have occurred had the acquisition been in effect for the periods presented, nor
do they purport to be indicative of the results that will be obtained in the
future.

3. Accrued expenses: Accrued expenses consist of the following:


<TABLE>
<CAPTION>
                                            September 30,
                                       -----------------------
                                          1997         1996
                                       ----------   ----------
<S>                                    <C>          <C>       
Initial public offering expenses       $  955,430   $  249,363
Acquisition expenses                      672,825
Sponsored research - Ohio University      311,489      342,506
Sponsored research - other                646,846      199,853
Nonrecurring expenses                     654,579
Other                                     907,203      569,893
                                       ----------   ----------
                                       $4,148,372   $1,361,615
                                       ==========   ==========
</TABLE>


        4.     Income taxes:

        No income tax provision or benefit has been provided for federal income
tax purposes as the Company has incurred losses since inception. As of September
30, 1997, net deferred tax assets totaled approximately $20,283,000 on total net
operating loss carryforwards of approximately $31,500,000, tax credits of
approximately $720,000 and capitalized research and development costs of
$6,918,000. The net operating loss carryforwards and tax credits expire on
various dates through 2011. Due to the uncertainty surrounding the realization
of these favorable tax attributes in future tax returns, all of the net deferred
tax assets have been fully offset by a valuation allowance.

        Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards may be limited under the change
in stock ownership rules of the Internal Revenue Code. As a result 


                                      S-10


<PAGE>   

of ownership changes which occurred in August 1997, the Company's operating tax
loss carryforwards and tax credit carryforwards are subject to these
limitations.

        5.  Long-term Debt Payable to Related Party:

        In March 1996, the Company entered into a promissory note with
Interneuron, a previous majority shareholder, bearing interest at a rate of 1%
over the prime lending rate. A total of $3,443,050 was outstanding under the
note as of September 30, 1996, including accrued interest of $80,680. Effective
immediately prior to the consummation of the Offering, the amount outstanding
under the promissory note, $9,694,938, including accrued interest of $600,068,
was contributed to the capital of the Company.

        In March 1995, the Company entered into a convertible debenture
agreement with Interneuron, at a rate of 1% over the prime lending rate. As of
September 30, 1996, the outstanding convertible debenture balance was $475,677,
including accrued interest of $59,058. Effective immediately prior to the
consummation of the Offering, the amount outstanding under the convertible
debenture, $509,333, including accrued interest of $92,714, was contributed to
the capital of the Company.

        In February 1997, in connection with the Company's bridge financing to
Mercator, the Company entered into a Bridge Line of Credit Letter Agreement with
Interneuron providing for loans of up to an aggregate of $6.6 million. The
bridge loan bore interest at 10% per annum. Effective immediately prior to the
consummation of the Offering, the amount outstanding under the convertible
debenture, $3,769,519, including accrued interest of $104,519, was contributed
to the capital of the Company.

        6. Commitments:

        The Company has entered into various operating leases for furniture,
fixtures and equipment which expire through the year 2000.

        In April 1994, the Company entered into a sale-leaseback equipment lease
financing agreement with a leasing company providing for funding of up to an
aggregate of $2.2 million for equipment purchased prior to September 30, 1996.
In January 1997, the agreement was amended to increase the aggregate funding
limit to $4.0 million and to extend the commitment period to March 31, 1997.

        In connection with the acquisition of Mercator, the Company assumed
liability for amounts outstanding under equipment loan agreements and an
equipment lease line of credit agreement providing for funding of up to $3
million for equipment purchases entered into by Mercator.

        The Company leases facilities under an operating lease that expires on
September 30, 1999. The lease provides for monthly rental payments of
approximately $30,100.

        The minimum rental commitments under these agreements are as follows:


<TABLE>
<CAPTION>
Years ending September 30,               Operating Leases    Capital Lease Obligation
                                          ---------------          -----------
<S>                                      <C>                 <C>        
1998                                           $409,760            $   903,475
1999                                            347,855                755,010
2000                                              3,444                260,189
2001                                                                     8,332
                                          ---------------          -----------
Total lease payments                           $761,059              1,927,006
                                          ===============
Less amount representing interest                                     (223,381)
                                                                   -----------
Present value of future lease payments                               1,703,625
Less current portion                                                  (761,929)
                                                                   -----------
Noncurrent   portion  of  capital  lease
obligation                                                          $  941,696
                                                                   ===========
</TABLE>

        Rent expense approximated $267,000, $263,000 and $186,000 during 1997,
1996 and 1995, respectively.


                                      S-11


<PAGE>   

        7. Related Party Transactions and Other Agreements:

               a. Loans to Employees: At September 30, 1997 and 1996, net loans
to employees totaled approximately $561,000 and $60,000, respectively. Of this
amount, approximately $515,000 and $50,000 represented loans to five executives
at September 30, 1997 and 1996, respectively. Portions of the loans are
forgivable upon the achievement of specified milestones. The loans have various
terms and interest rates ranging from 0% to 7%, and are secured by second deeds
of trust on residences. In October 1997, an executive with an outstanding loan
of $150,000 resigned from the Company. The loan is due upon the earlier of the
sale of the residence or October 1998.

               b. License and Research Agreements: The Company entered into a
license agreement and a sponsored research agreement with Ohio University in
January 1992, certain terms of which were amended in October 1993. The license
agreement grants the Company the exclusive worldwide license to patent and other
rights to yolk sac stem cells and related technologies in exchange for royalties
based on sales. The research agreement requires the Company to fund specified
minimum levels of research and related expenses, as well as any additional costs
approved in advance by the Company. The license agreement also contains certain
requirements related to the management and operation of the Company, including
the nomination by The Ohio University Foundation of two designees of The Ohio
University Foundation to the Board of Directors of the Company. The Ohio
University Foundation's right to designate two representatives to the Board of
Directors of the Company terminated upon the consummation of the Company's
initial public offering.

        Under the terms of a stock purchase agreement, The Ohio University
Foundation purchased 58,333 shares of common stock at $6 per share in February
1996. An additional 71,900 common shares were issued to The Ohio University
Foundation in August 1997 pursuant to an anti-dilution provision. Under the
terms of a stock purchase right The Ohio University Foundation purchased an
additional 25,000 common shares at $2.69 per share in August 1997.

        In April 1993, the Company entered into a second license agreement and a
sponsored research agreement with Ohio University pursuant to which the Company
agreed to fund research relating to the T7T7 gene delivery system. The license
agreement grants the Company the exclusive worldwide license to all patent and
other rights derived from this and related technologies in exchange for
royalties based on sales.

        In November 1994, the Company was awarded a competitive grant of $2.0
million through the Advanced Technology Program ("ATP") of the U.S. Department
of Commerce. The funds will be received over a three-year period commencing June
1, 1995. In the years ended September 30, 1997, 1996 and 1995, the Company
recorded revenue of $641,000, $751,000 and $259,000, respectively. At September
30, 1997 and 1996, respectively, $129,699 and $175,498 was due under the ATP
grant.

        In March 1995, the Company entered into a license and collaboration
agreement with Chiron Corporation ("Chiron"). As required by the agreement, an
initial cash payment of $2.5 million was paid by Chiron to the Company in April
1995 as a license fee and reimbursement of past research and development
expenses. In addition, the Company reimbursed Chiron for the start-up
manufacturing costs incurred related to this agreement of $750,000 through
September 30, 1996. Chiron paid $500,000 to the Company in January 1996 for
continued research funding. The agreement also calls for future payments
contingent upon the achievement of certain milestones.

        In May 1995, the Company entered into a sponsored research and license
agreement with Novo Nordisk through its subsidiary, ZymoGenetics, Inc. The
agreement calls for research and license fees to be paid to the Company,
contingent upon certain conditions and the meeting of certain milestones.

        In December 1996, the Company entered into a license agreement with
Amgen, Inc. ("Amgen"). The Company recorded revenue of $500,000 in December
1996, in consideration for the licenses granted. The agreement also provides for
a license maintenance fee as well as milestone and royalty payments to be
received contingent upon the achievement of certain milestone driven events.
Additionally, in December 1996, the Company entered into a stock purchase
agreement with Amgen, under which Amgen purchased 1,023,256 shares of the


                                      S-12


<PAGE>   

Company's common stock for $5.5 million concurrently with the closing of the
Offering, with $4.5 million paid in cash and $1 million in the form of a
non-interest bearing promissory note. The promissory note will become due in two
payments, with $500,000 due in December 1997 and $500,000 due in December 1998.

        In September 1997, the Company entered into a collaboration agreement
with SmithKline Beecham Clinical Laboratories ("SBCL") for the exclusive rights
to develop and perform genetic testing under the Company's patent applications
covering the gene for hereditary hemocromatosis. Under the terms of the
agreement the Company is to be paid an up-front fee of $100,000 which is
creditable against royalties due in the first year. This amount was paid in
October 1997. In addition, SBCL will pay the Company annual license fees which
will be creditable against royalties due the Company during the year. Under the
terms of the agreement, SBCL will also pay royalty fees to the Company for each
use of any diagnostic or screening test performed. No amounts were recorded
under the agreement at September 30, 1997.

        Additionally, the Company has entered into various sponsored research
agreements with varying terms up to two years in length. The total sponsored
research expense was $849,224, $544,079 and $601,103 for 1997, 1996 and 1995,
respectively, and $4,083,983 for the period from May 8, 1992 (date of inception)
to September 30, 1997. Payments to Ohio University for sponsored research
totaled $0, $108,624 and $398,064 for 1997, 1996 and 1995, respectively, and
$1,389,756 for the period from May 8, 1992 (date of inception) to September 30,
1997. In addition, at September 30, 1997, the Company had commitments to fund
additional sponsored research of approximately $958,000.

               c. Option Agreement: In July 1997, the Company entered into an
option agreement with Interneuron on the Company's Del-1 protein. Under the
agreement, Interneuron received a right of first refusal to acquire an exclusive
royalty-bearing right to manufacture, use and sell Del-1 on terms to be
negotiated. In the event the Company grants such rights to a third party, the
Company must share fees, milestone payments and royalties with Interneuron.
Should the Company develop and sell the technology independently, the Company
will pay Interneuron royalties on net sales. The option agreement terminates
upon the expiration of the last to expire of any issued patent, or patent that
might issue, relating to the licensed technology, or upon the conclusion of a
license agreement with Interneuron. In exchange for receiving the option,
Interneuron paid the Company $1 and relinquished its right to receive certain
minimum returns on its Series A and B Preferred Stock (see Note 12).

        8.     Nonrecurring Non-operating Expense:

        During fiscal year 1996, the Company incurred $973,525 of costs related
to an attempted initial public offering, in connection with which a Form S-1
Registration Statement with the Securities and Exchange Commission was filed on
June 6, 1996. Such costs were expensed in accordance with accounting
requirements during fiscal 1996.

        9.     Employee Benefits:

        Employees of the Company are eligible to participate in the Interneuron
Pharmaceuticals, Inc. 401(k) Savings Plan under which employees may defer a
portion of their annual compensation. Company contributions to the 401(k)
Savings Plan may be made on a discretionary basis. As of September 30, 1997, no
Company contributions have been made.

        10.    Stock Options and Warrants:

               a. Stock Options: At September 30, 1997, the Company had reserved
3,928,609 shares of common stock for issuance under various stock option plans,
including plans resulting from the acquisition of Mercator (see Note 2). The
plans provide for the granting of incentive stock options to officers and
employees of the Company and nonqualified stock options to officers, employees,
directors and consultants of the Company at prices not less than fair market
value (as determined by the Compensation Committee of the Board of Directors) on
the date of grant. Options are exercisable at times and in increments specified
by the Compensation Committee. Options generally vest over three or four years
and expire in five or ten years.


                                      S-13


<PAGE>   
Activity under the plans is as follows:


<TABLE>
<CAPTION>
                                                Weighted
                                                 Average
                                     Number of  Price per
                                      Options     Share
                                    ---------------------
<S>                                 <C>         <C>  
Outstanding at September 30, 1994      178,625    $2.10
    Granted                            192,250    $5.89
    Canceled                           (20,472)   $0.84
    Exercised                           (1,500)   $0.20
                                    ----------    -----
Outstanding at September 30, 1995      348,903    $4.28
    Granted                            432,250    $7.22
    Canceled                           (55,353)   $3.66
    Exercised                          (38,300)   $1.74
                                    ----------    -----
Outstanding at September 30, 1996      687,500    $7.22
    Granted                          2,146,074    $4.11
    Canceled                          (603,419)   $7.86
    Exercised                           (6,692)   $1.11
                                    ----------    -----
Outstanding at September 30, 1997    2,223,463    $4.11
</TABLE>


        At September 30, 1997, there were 1,705,146 shares of common stock
available for grant under the Company's stock option plans. In November, 1997,
the Company granted options to purchase 828,322 shares exercisable at $4.00 per
share.

        The following table summarizes information with respect to stock options
outstanding at September 30, 1997:


<TABLE>
<CAPTION>
                                        Weighted
                                         Average     Weighted        Number
                         Number         Remaining    Average       Exercisable      Weighted
   Range of         outstanding at    Contractual    Exercise     at September       Average
Exercise Price    September 30, 1997  Life (years)    Price         30, 1997      Exercise Price
------------------------------------------------------------------------------------------------
<S>               <C>                 <C>            <C>          <C>             <C>  
$      0.20              14,750          5.38         $0.20            14,750         $0.20
$      0.68             573,930          8.88         $0.68           573,930         $0.68
$2.00-$4.58              80,047          6.53         $3.67            66,297         $3.60
$      5.38             951,885          8.85         $5.38           150,000         $5.38
$5.50-$6.50             602,851          8.57         $5.52           265,312         $5.52
                      ---------         -----         -----         ---------         -----
                      2,223,463          9.10         $4.12         1,070,289         $2.72
</TABLE>


        In December 1996, the Company canceled all stock options with exercise
prices of $5.50 or more. This amounted to 581,750 options originally granted
from the 1992 and 1996 plans. The options were regranted at a new exercise price
of $5.50, the estimated fair market value at the time of the regrant.

        In August 1997, the Company adopted the 1996 Employee Stock Purchase
Plan (the "ESPP"). It is intended to qualify under Section 423 of the Code and
to provide employees with an opportunity to purchase the Company's common stock
through payroll deductions. Under the ESPP, employees may purchase the Company's
common stock at the lesser of (i) 85% of the common stock's fair market value on
the first day of the 24-month purchase period, or (ii) 85% of the fair market
value on the last day of each six month accrual period. A total of 100,000
shares have been reserved for issuance under the ESPP. As of September 20, 1997,
no shares have been issued under the ESPP.

        The Company has elected to continue to follow the provisions of APB No.
25, "Accounting for Stock Issued to Employees", for financial reporting purposes
and has adopted the disclosure-only provisions of Statement 


                                    
                                      S-14

<PAGE>   

of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been recognized
for the Company's Stock Option Plans (or ESPP if applicable). Had compensation
cost for the Company's Stock Option Plans been determined based on the fair
value at the grant date for awards in 1996 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
for the years ended September 30, 1997 and 1996 would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                                       YEAR ENDED SEPTEMBER 30,
                                                                    ------------------------------ 
                                                                       1997                1996
                                                                    ----------          ---------- 
<S>                                                                 <C>                 <C>        
Net loss  applicable to common  shareholders  - as reported          $(42,566)            $(5,483)
Net loss  applicable to common  shareholders - pro forma             $(43,381)            $(5,681)
Net loss - as reported                                               $(  9.82)            $( 1.92)
Net loss per share - pro forma                                       $( 10.01)            $( 1.98)
</TABLE>


        The above pro forma disclosures are not necessarily representative of
the effects on reported net income for future years.

        The aggregate fair value and weighted average fair value per share of
options granted in fiscal 1997 and 1996 were $3.6 million and $1.9 million and
$1.68 and $4.45 per share, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes Option Pricing Model with
the following weighted average assumptions:


<TABLE>
<CAPTION>
                                          1997            1996
                                          ----            ----
<S>                                       <C>            <C>
Expected volatility                       81.34%             0%
Risk-free interest rate                    6.03%          6.10%
Expected life of options in years         5 years        5 years
Expected dividend yield                       0%             0%
</TABLE>


               b. Warrants: In June 1995, the Company issued to designees of an
affiliate of Interneuron, warrants to purchase a total of 34,901 shares of
Series B convertible preferred stock at $6.875 per share. The warrants were
issued in conjunction with the private placement offering discussed in Note 12.
Upon the completion of the Offering, the warrants were converted into warrants
to purchase 72,536 shares of common stock at an exercise price of $3.31 per
share. The warrants expire in August 2002. The Company paid the affiliate
approximately $129,000 as its share of placement agent fees.

        In connection with the Offering, the Company issued 2,750,000 warrants,
which entitle the holder to purchase one share of common stock at $10.50,
subject to adjustment under certain circumstances. The warrants are exercisable
through August 2002. The outstanding warrants are redeemable by the Company at
$0.01 per warrant, under certain conditions. A holder of the warrants does not
possess any voting or other rights as a stockholder of the Company until such
holder exercises the warrant.

        In connection with the acquisition of Mercator, the Company issued
warrants to purchase 33,744 shares of common stock at an exercise price of $1.48
per share on or before August 31, 2003 and 22,993 shares of common stock at an
exercise price of $5.09 on or before October 2, 2004.

        11.    Common Stock:

        On August 6, 1997, the Company's registration statement with the
Securities and Exchange Commission was declared effective for the sale of
2,750,000 units. On August 12, 1997, the Company concluded the sale of the
2,750,000 units at an offering price of $7 per unit, with net proceeds to the
Company of $16.3 million. Each unit consisted of one share of common stock and
one Common Stock Purchase Warrant; see Note 10.

        In September 1997, the underwriters exercised a portion of their
over-allotment option and purchased 125,000 units at $7 per unit.


                                      S-15


<PAGE>   

        12.    Preferred Stock:

        In December 1994, the Company's Board of Directors approved the
authorization of 2,120,000 shares of Series A and 880,000 shares of Series B
preferred stock, which were convertible into shares of Class A common stock and
had preferential rights in terms of dividends and liquidation over common stock.
Shares of preferred stock had voting rights equal to the number of shares of
their common stock equivalent. Through August 1997, the Company had issued
2,020,496 shares of Series A and 349,000 shares of Series B preferred stock in
connection with private placements, whereby the Company received a total of
approximately $1,560,000, net of offering costs, and cancelled the
then-outstanding intercompany debt. These private placements consisted of the
sale of units, each unit consisting of shares of preferred stock of the Company,
shares of preferred stock of another subsidiary of Interneuron, Transcell
Technologies, Inc., and a put protection right from Interneuron. The put
protection right provided that on the third anniversary of the final closing
date of the private placement, the owner had the right to sell to Interneuron a
percentage of the preferred stock of the Company that is deemed to be illiquid,
as defined by the agreement. The Series A and B preferred stock was convertible,
at any time at the option of the holder, into shares of Class A common stock was
based on a conversion ratio subject to adjustment based on several factors. Upon
an offering, the conversion ratio was to be adjusted so that the holders
received a minimum return of 35% annually. In July 1997, the holder of the
Series A Preferred Stock relinquished its right to receive the minimum returns
on its Series A Preferred Stock (see Note 7).

        In connection with the Offering, all outstanding shares of Series A and
B preferred stock were converted into 3,074,767 shares of common stock. As a
result of the minimum return provisions described above, a preferred stock
dividend of approximately $12.3 million was recorded by the Company.

        In August 1997, the Company's Board of Directors authorized the issuance
of an additional 2,000,000 shares of Preferred Stock. The total number of shares
of Preferred Stock available for issuance is 5,000,000 as of September 30, 1997.

        13.    Supplemental Disclosure for Consolidated Statement of Cash Flows:

        The Company paid interest aggregating $78,177, $59,087 and $84,265 for
the years ended September 30, 1997, 1996 and 1995, respectively, and $244,466
for the period May 8, 1992 (date of inception) through September 30, 1997.

        In 1995, Interneuron converted debt of $11,495,165 and accrued interest
of $1,132,935 into 2,020,496 shares of Series A Preferred stock.

        In 1996, the Company purchased fixed assets with accounts payable in the
amount of $126,261. As of September 30, 1996, the amount was included in
accounts payable.

        In August 1997, in conjunction with the acquisition of Mercator
described in Note 2, the Company issued 3,442,814 shares of common stock valued
at $15.4 million for all of the outstanding shares of Mercator. In addition,
acquisition costs of $1,154,803 were unpaid at September 30, 1997 and are
included in accounts payable and accrued liabilities.

        In August 1997, in conjunction with the Offering described in Note 11,
the following non-cash transactions occurred:

        1)      The Company issued 1,023,256 shares of common stock to Amgen for
                $4.5 million cash and a $1.0 million non-interest bearing
                promissory note receivable as described in Note 7.

        2)      Interneuron forgave the amounts outstanding under the
                convertible debenture, the promissory note and the bridge line
                of credit letter agreement, totaling $13,940,814, including
                accrued interest of $797,301 as described in Note 5.


                                    
                                      S-16

<PAGE>   

        3)      As a result of certain minimum return provisions in the Series A
                and B preferred stock, a preferred stock dividend and
                contribution of capital of approximately $12.3 million was
                recorded. See Note 12.

        4)      Offering costs of $1,346,761 were unpaid at September 30, 1997
                and are included in accounts payable and accrued liabilities.


                                      S-17